Third Quarter U.S. Economic Growth

The advance estimate of U.S. third quarter GDP was released this morning, indicating that the economy grew at 2 percent.

Third quarter growth was driven by private consumption and government defense consumption. Investment expenditures were weak, and trade was a small drag on third quarter growth. Business investment expenditures actually contracted, while residential real estate investment was strong at 14.4 percent.

The residential investment is welcome and appears to be a bounce off of the bottom for the residential real estate market. The recovery in housing will likely be bumpy, so we should not expect 14.4 percent residential investment growth rates in the next few quarters.

This report indicates a weak economy despite indicating third quarter’s growth was greater than second quarter growth of 1.3 percent. If we take out “computers” which was boosted by the release of a new I-phone and government expenditure growth, then economic growth would have been 1.1 percent rather than 2 percent.

As one might suspect with third quarter consumption expenditures of two percent, up from 1.5 percent in second quarter, the BEA measure of the personal savings rate fell from 4 percent in the second quarter to 3.7 percent in the third quarter. This report indicates that savings and investment was relatively low in the third quarter.

We have come to a point where short-run Macroeconomic stimulus policies are a waste of resources. The trough of the Second Great Contraction, 2009 Q2 as measured by the level of real GDP, was over three years ago. We are way past it, and we need to get over it. What is needed now are economic behavior and policies that will foster medium-term and long-run growth.

What is healthiest for U.S. medium and long-run economic growth is savings and investment. Households should continue rebuilding their balance sheets and governments should put policies in place for dealing with structural budget problems over time. These activities would provide the environment for private business to invest and grow the economy.

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