The Bureau of Economic Analysis (BEA) released the “advance” estimate of real GDP growth for the third quarter of 2016 with the standard caveat that this estimate “is based on source data that are incomplete or subject to further revision by the source agency.” That combined with some concentrated strengths and lingering weaknesses makes the apparent improvement over last quarter worthy of extra scrutiny.
Real GDP grew at a 2.9% seasonally adjusted annual rate, more than double the 1.4% in the second quarter (growth was less than 1% in the prior two quarters), with the largest contributions coming from personal consumption expenditures (PCE), exports and inventory investment. PCE growth has been a reliable contributor to growth, including this quarter (1.5 percentage points), if less than last quarter’s outsized contribution (2.9 percentage points). Inventory investment swung from a large drag last quarter (-1.2 percentage points) to a positive this quarter (0.6 percentage points) and should be positive to neutral going forward. Exports contributed 1.2 percentage points to growth after averaging a modest drag on growth over the prior six quarters.
Translation: the acceleration in growth won’t be sustained without a rebound in nonresidential fixed investment, in particular equipment spending. The drag from the energy sector (captured in the structures component) has been dissipating but persists; the intellectual property component of investment has been positive and steady; but equipment spending, the largest component of nonresidential fixed investment, has been in a slump.
Residential fixed investment has been a steady contributor to growth recently but has been weakened by volatility in housing starts in the first half of the year.
Overall, the acceleration in growth is encouraging, but to be sustained it will take a rebound in equipment spending and a bottoming out of the energy sector. Exports and inventories fueled the acceleration in the third quarter but more reliable contributors will support future growth.