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Economy in Brief

US GDP Growth Weakest Since 2003
by Tom Moeller October 27, 2006

U.S. real GDP grew just 1.6% (AR) last quarter, well below the 3.5% average of the prior four quarters and the weakest since 1Q 2003. Growth even fell short of Consensus expectations for a 2.5% rise.

Virtually all of the disappointment was due to housing. Residential investment fell 17.4% (AR, -7.7% y/y) after an 11.1% decline during 2Q. That decline alone sapped 1.1 percentage points from GDP growth last quarter and it was the largest quarterly subtraction made by housing since 1981.

A deterioration in the net export deficit also subtracted 0.6 percentage points from last quarter's growth in real GDP. That followed a 0.4 point addition during 2Q. Exports grew 6.5% (9.0% y/y) but import growth outpaced that with a 7.8% (7.8% y/y) rise. It was paced by a 13.4% rise in nonauto consumer goods, a 15.4% rise in capital goods and an 18.6% rise in industrial supplies & materials other than petroleum.

Growth in final sales to domestic purchasers overall accelerated to 2.2% despite the weakness in housing. The acceleration was due to 3.1% (2.8% y/y) growth in real personal consumption expenditures which was up from 2.6% growth during 2Q while quarterly growth in business fixed investment nearly doubled to 8.6% (7.9% y/y). Equipment & software investment recovered after a 2Q decline with a 6.5% (5.7% y/y) gain. Notably strong was business investment in structures, up 14.1% (13.7% y/y).

Government expenditures also picked up last quarter and grew 1.9% (1.6% y/y) though the Federal government's spending on defense fell 0.7% (-1.1% y/y), the third decline in the last four quarters.

A lessened pace of investment in inventories subtracted 0.1 percentage points from GDP growth following a 0.4 point addition during 2Q.

The GDP chain price index rose just 1.8%, its weakest quarterly advance in over three years. The PCE chain price index grew just 2.5% (2.9% y/y). That increase was held back by quarterly declines in prices of furniture (-4.3% y/y) and apparel (+0.1% y/y). The chain price for residential investment fell 0.4% (+3.1% y/y), the first quarterly decline since early 2002.

Barreling Down the Road To Recession? from the Federal Reserve Bank of St. Louis can be found here.

Chained 2000$, % AR 3Q '06 2Q '06 Y/Y 2005 2004 2003
GDP 1.6% 2.6% 2.9% 3.2% 3.9% 2.5%
  Inventory Effect -0.1% 0.4% 0.6% -0.3% 0.4% 0.0%
Final Sales 1.7% 2.1% 2.3% 3.5% 3.5% 2.5%
  Foreign Trade Effect -0.6% 0.4% -0.1% -0.1% -0.5% -0.3%
Domestic Final Demand 2.2% 1.6% 2.4% 3.6% 4.0% 2.8%
Chained GDP Price Index 1.8% 3.3% 2.9% 3.0% 2.8% 2.1%
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