Assessing the Quality of Q3 GDP Growth

In my last post I outlined how I'd assess the quality of future GDP growth.  I expected to see near term growth coming from a combination of of export growth and government spending near term with business investment eventually taking the baton from government near term.  I also said how I would not want to see growth that comes from consumption of consumer goods (with a high propensity to import) and housing investment.  (I use nominal GDP vs. real GDP, becuase I care about actual cash changing hands, and inflation is relatively low.)

The change in nominal GDP from Q2 to Q3 was $150.3 billion.  Personal consumption expenditures was up $162.6 billion, although $39.4 billion came from increased sales of autos and $48.1 billion came from gasoline and other fuels.  Imports of autos increased $43.2 billion, meaning that the increase in auto sales, partly fuelled by the "cash for clunkers" program, was a net drag on GDP growth.  We also imported $42.1 billion of petroleum products.  In other words, the net effect on GDP from domestinc demand in the auto and petroleum sectors (excluding changes in inventories) was a net gain of $2.2 billion.  Exports of autos and parts increased $20.2 billion thanks to increased demand abroad.

Residential construction increased $15 billion, or about 10% of the net increase in GDP.  Given the excess supply already existing in the housing market, I consider this to be low-quality growth, spurred temporarily by the first-time buyer tax credit.

Business investment added $2.9 billion to GDP growth, more than all of which came from a smaller decline in changes in inventories.  Business investment in structures fell $24.5 billion and investment in software and equipment fell $1.7 billion.  I expect investment in structures (largely commercial real estate) to continue to fall and for investment in inventories, software and equipment to start to rise.

Government spending added $28.6 billion to growth.

Exports increased $69.5 billion and imports excluding autos and oil was up $32.6 billion, a net increase of $36.9.  Imports of autos and oil was $85.3 billion, accounting for 72% of the increase in imports.  Thus the net drag from total net exports was $48.4 billion.

If we strip out the effect of housing investment, domestic auto sales and domestic oil consumption, "quality" GDP growth was $128.5 billion, or 3.7% nominal GDP growth.  Government spending accounted for $28.6 billion of that growth, meaning $99.9 billion of nominal GDP growth came from "quality" private sources.  That would have yielded 2.9% nominal GDP growth.

All-in-all, not bad. 

2 thoughts on “Assessing the Quality of Q3 GDP Growth

  1. Interesting post, I like your methodology. Also, the Times keeps hammering Edmunds regarding cash for clunkers. There may have been some pull through of demand but that will be matched by output to rebuild inventories. So maybe cash for clunkers is not a 1 quarter gimmick but a 2 or 3 quarter gimmick, I don’t know. Let me know if you or anyone you know has done some thinking about what greater economic volatility henceforth will mean for the real economy.


  2. Shaggy – yes, this quarter we see auto consumption up, more than offset by increase in auto imports and decrease in inventories…next couple of quarters we may see decline in auto consumption, offset by a decline in imports and an increase in inventories, making the whole thing a wash.


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