Second Look at GDP Growth in the Third Quarter – Better But Beware

The Bureau of Economic Analysis (BEA) released the second estimate of real GDP growth for the third quarter of 2016. Real GDP grew at a 3.2% seasonally adjusted annual rate, an upward revision from the advance estimate of 2.9%. Growth was 1.4% in the second quarter. The upward revision was based mainly on faster growth in personal consumption expenditures (PCE) that was partially offset by weaker investment spending.

The upward revision and acceleration from the first half of the year notwithstanding, the report still has weaknesses. Personal consumption expenditures, roughly two thirds of GDP, have been the workhorse of GDP growth in recent quarters and represent sustainable growth. However, the surprisingly strong growth in exports was maintained in the revision but is unlikely to be maintained in coming quarters. And weaker than previously estimated investment spending reduced overall growth and relied mainly on inventory rather than fixed investment, but may have the silver lining of being positive after three consecutive quarters of decline.

GDP growth has accelerated from recent quarters but the composition of growth is less strong than the rate suggests and its sustainability will require a rebound in business fixed investment.

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