The Bureau of Economic Analysis (BEA) released the advance estimate of real GDP growth for the third quarter of 2013. Real GDP grew at a seasonally adjusted annual rate of 2.8%, modestly higher than the 2.5% growth in the second quarter. Real GDP grew at annual rate of 1.1% in the first quarter.
On the surface faster third quarter growth is good, but the details are less encouraging for growth going forward. The main contributors to the rate of growth were personal consumption expenditures (PCE) and inventory investment. But the main reasons growth accelerated in the third quarter from the second quarter were decelerating imports (imports subtract from growth) and accelerating inventory investment. Slower growth in imports only “technically” increases growth by subtracting less than they otherwise would have, and the inventory investment is likely to slow next quarter. Absent these factors growth would have slowed from the second to third quarters.
The contributions of these factors resulted in GDP growth accelerating despite slowing PCE. PCE, historically 65%-70% of GDP, slowed to a 1.5% annual growth rate from 1.8% in the second quarter and 2.3% in the first quarter. The strength PCE did show was in durable goods, goods intended to last several years and purchases unlikely to be repeated in the near term, and within the durable goods category, largely automobiles. Automobile sales have slowed in September and October from a recent peak, a pace above 16 million units per year in August, the middle of the third quarter. This is likely to reduce PCE growth even further in the fourth quarter.
The most conspicuous looming factor restraining growth in the fourth quarter is the impact of the partial federal government shutdown in the first half of October combined with the 11th hour resolution to raising the debt ceiling in mid-October. The impact of furloughed federal workers and reduced government output in early October will be muted by the catch-up that is taking place (as this delayed GDP report reflects) as the remainder of the quarter unfolds. But some of the impact will shift growth from the fourth quarter to the first quarter of next year as the catching up continues, and some of the impact will be lost growth because the everyday commerce related to federal employees (e.g., transportation, retail, communication) didn’t happen and won’t be made up.
The blow to consumer and business confidence from dysfunctional government is the most uncertain restraint on growth going forward. The October conflict is temporarily resolved and the impact on fourth quarter growth is likely to be small, but the stage is set for a repeat in January and February of next year. A repeat performance of October’s dysfunction, or a series of negotiations that only postpone real resolution will restrain growth for as long as the drama continues.