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Economy in Brief

Dip in U.S. 3Q'08 GDP Revised Little; Profits Fell (Again)
by Tom Moeller November 25, 2008

U.S. real GDP growth last quarter was little revised at -0.5% due to offsetting revisions to final demand growth (down) and inventories (up). The modest 0.5% (AR) decline compared to the advance report of a 0.3% dip and the revised figure matched Consensus expectations. Continuing its recent trend, the y/y rate of growth of 0.7% was the weakest since the end of the 2001 recession.

Released for the first time were corporate profits. They fell 1.0% and were down 9.0% y/y. Last quarter's decline compared to a 3.8% drop during 2Q and it was the seventh decline of the last eight quarters. The y/y decline was the weakest since the 2001 recession. The financial sector's travails continued to lead profits lower. Profits here fell 16.4% (-28.3% y/y) during 3Q. To some extent, cost cutting amongst domestic nonfinancial corporations offset that decline in financial sector earnings, but it wasn't by much. Profits in the domestic nonfinancial sector rose 6.1% during 3Q , but the weaker economy still left them down 4.8% versus last year. Finally, economic weakness lowered repatriated foreign sector earnings. They slipped 0.2% and were down for the third consecutive quarter. For the four quarters ending in 3Q, however, earnings were still positive, up 4.5%.

Back in the U.S., real final sales to domestic purchasers remained notably weak in 3Q. The estimate was shaved to a 2.3% annual rate of decline versus the initial figure of a 1.8% drop. It remained the largest quarterly decline since the end of the 1990-91 recession. The year-to-year dip of 0.3%, while still modest, was the first since 1991.

A decline in real PCE subtracted 2.7 percentage points from 3Q real GDP growth after a 0.9 point addition during 2Q. Personal consumption expenditures fell at a 3.7% annual rate (0.0% y/y) versus the initial estimate of a 3.1% fall. The drop followed 1.2% growth during 2Q which presumably was fueled by tax rebate checks but the lift seems to have been slight. Spending on autos & light trucks continued to collapse, down at a 26.4% annual rate (-15.0% y/y). Real spending on furniture & other household equipment fell at an 8.9% rate; Lower prices fueled the positive 2.4% y/y gain in furniture sales; nominal sales were down 1.6% y/y. Real spending on apparel fell at a 13.6% clip (-1.1% y/y) and that more than reversed a 2Q jump. Spending on consumer services was unchanged. The y/y gain of 1.1% in consumer services remained the weakest since 1981.

Residential construction fell again last quarter and the little revised 17.6% (-20.9% y/y) rate of decline subtracted 0.7% points from GDP growth.

Business fixed investment was little changed at a -1.5% annual rate (+1.7% y/y), the first decline since the fourth quarter of 2006. It followed 2.5% growth during 2Q, a 4.9% rise during 2007 and roughly 7.5% growth in 2006 and 2005. Equipment investment repeated its 2Q performance and fell at a 5.6% rate (-2.6% y/y), the third consecutive quarter of decline. Conversely, structures investment was firm again and rose at a 6.6% annual rate (10.5% y/y).

Inventory accumulation added a somewhat greater 0.9 percentage points to GDP growth after three consecutive quarters of subtraction.

An improved foreign trade deficit added the same 1.1 percentage points to U.S. growth as estimated last month and it remained the main source of lift to GDP growth. The addition was, however, almost one third of that in 2Q. Exports grew at a slower 3.4% annual rate (6.2% y/y), half that in 2Q. Growth in imports weakened with the slowdown in overall economic growth. The 3.2% fall (-3.4% y/y) was the fifth quarterly decline in the last six.

Spending by governments was strong again. The 5.3% rise (3.0% y/y) was little revised but the quickest since early 2003.

The GDP chain price index surged at an unrevised 4.2% annual rate. The accelerated rate of increase owed to a 5.2% jump in the PCE price index which was fueled by higher energy prices. Capital spending prices rose at an accelerated 4.3% rate (2.2% y/y) while the residential investment price deflator declined for the fourth straight quarter (-1.9% y/y).

The Federal Reserve Board on Tuesday announced the creation of the Term Asset-Backed Securities Loan Facility (TALF) and the announcement can be found here.

Chained 2000$, % AR 3Q '08 (Preliminary) 3Q '08 (Advance) 2Q '08 3Q Y/Y 2007 2006 2005
GDP -0.5 -0.3 2.8 0.7 2.0 2.8 2.9
  Inventory Effect 0.9 0.6 -1.5 -0.4 -0.4 0.0 -0.2
Final Sales -1.4 -0.8 4.4 1.1 2.4 2.8 3.1
Foreign Trade Effect 1.1 1.1 2.9 1.4 0.6 0.2 0.0
Domestic Final Demand -2.3 -1.8 1.3 -0.3 1.8 2.6 3.1
Chained GDP Price Index 4.2 4.2 1.1 2.7 2.7 3.2 3.3
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