Third Quarter GDP Growth – 2nd Estimate: Inventory Size Matters

The Bureau of Economic Analysis (BEA) released the second estimate of real GDP growth for the third quarter of 2011. Revised GDP grew at a seasonally adjusted annual rate of 2.0 percent, down from the first estimate of 2.5 percent, but up from 1.3 percent in the second quarter and 0.4 percent in the first quarter. The major components of GDP were revised marginally from the initial estimates: personal consumption expenditures, fixed investment and government spending were slightly lower. Exports were slightly stronger, while imports were weaker combining for marginally stronger net exports. The downward revision was mostly attributable to private inventory investment, contracting by $8.5 billion (constant 2005 dollars) rather than expanding by $5.4 billion as initially reported, and shaving one half of one percentage point from GDP growth in the revised estimate.

GDP growth of 2.0 percent is subpar but it is improving over past quarters, giving credence to a winding down of earlier “transitory factors” holding growth back, and the report has some positive features. Excluding changes in private inventories, third quarter growth was 3.6 percent, up from 1.6 percent in the second quarter signaling a strengthening of underlying demand.

Also, the decline in inventories this quarter and the deceleration of inventory accumulation last quarter subtracted from GDP growth. This inventory adjustment combined with rising sales and a stable inventory/sales ratio suggests that future changes in inventories will contribute to rather than subtract from GDP growth.

(For the mathematically inclined, the change in the level of inventories (i.e., the first derivative) is the relevant concept for the level of GDP, but the second derivative affects GDP growth. For more detail, see: http://www.bea.gov/national/pdf/NIPAhandbookch7.pdf.)



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