GDP Growth in the Third Quarter – Through the Looking Glass

Up is down and down is up. The Bureau of Economic Analysis (BEA) released the second estimate of real GDP growth for the third quarter of 2015, boosting growth 0.6 percentage points to 2.1% from the advance estimate of 1.5%. Unfortunately, the boost came mainly from inventory investment, which unwound the much needed correction in the advance estimate. Personal consumption expenditures (PCE), exports and government spending were revised down, and imports were revised up, all of which weakened growth. Fixed investment, both residential and non-residential, were revised up, contributing modestly to growth.

Despite the higher growth headline number, 2.1%, major sectors of the economy slowed from last quarter and the correction to inventory investment that we thought was behind us is now in front of us and will pull down the growth numbers next quarter. Stepping back, there are positive notes to the report: PCE, while slower than last quarter, remains strong; fixed investment slowed but hasn’t collapsed; government spending is adding to rather than subtracting from growth. The recovery from the Great Recession continues and the weakness of this report isn’t a major setback, but the upside-down nature of these revisions confounds interpretation; it’s not what it appears, it’s curiouser and curiouser.

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