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.