Inventory-Building Masks Stagnant 3rd Quarter GDP

The Bureau of Economic Analysis released its first preliminary estimate of U.S. Gross Domestic Product (GDP) on Friday morning.  (Link provided above.)  GDP grew by 2.0%, a marginal improvement over the 2nd quarter final reading of 1.7%.  Inventory-building added 1.44% to GDP.  That’s not good.  Inventories can’t grow indefinitely and, at some point, are corrected with inventory reductions.  Strip out inventory-building and GDP rose by only 0.56% – less than the rate of population growth.

Before going further, I should point out that all of these numbers are dependent on the government’s estimate of inflation, or what they call the GDP “deflator.”  GDP actually rose at an annual rate of 4.2%, but the government estimates the GDP deflator to be 2.2%.  Thus, “real” (adjusted for inflation) GDP rose at an annual rate of only 2.0%.  What if the government underestimated inflation and its effect on the cost of living?  The numbers would show “economic growth” but everyone would be getting poorer.  I point this out just to illustrate how questionable these numbers can be.

With that said, factoring in population growth of about 1% per year, real per capita GDP rose at an annual rate of about 1%, little changed from the 2nd quarter.  With stimulus spending factored out, it actually rose at much more robust pace of 4.5%.  But that’s a technicality, caused by a huge downward swing in stimulus spending from the previous quarter.  As you can see from the following chart, real per capita GDP with stimulus spending factored out has been bouncing up and down (likely due to lags in reporting on stimulus spending), but shows no upward trend.  In other words, the stimulus spending halted a cataclysmic decline in GDP and stabilized it, but there’s no evidence of growth.  And the stimulus spending will soon be coming to an end. 

Real Per Capita GDP

This is why the Fed is so worried about prospects for the economy and is widely expected to start pumping billions more into the economy.  More on that in the next post.

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