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Economy in Brief

Q3 GDP Posts First Gain After More-Than Year Long Recession
by Tom Moeller October 29, 2009

The U.S. economy grew last quarter at hardly a barn-burning rate, but at least it was positive for the first time in over a year. Real GDP during 3Q'09 grew at an expected 3.5% annual rate after a 3.7% decline since late-2007. The rise was fueled by upturns in domestic demand and inventories but lessened by deterioration in the foreign trade deficit. Consensus expectations are that economic growth will continue in coming quarters at roughly a 3.0% rate which, by postwar standards, would be subpar.

Domestic final demand growth was positive for just the second quarter since 1Q'08. The upturn owed to a 3.1% gain in consumer spending (-0.3% y/y) that was led by a 22.8% rise in durables consumption. The Cash for Clunkers sales incentive program by auto-makers caused motor vehicle consumption to jump at a 56.4% annual rate, though it still was up just 1.4% from one-year earlier. Elsewhere, personal consumption of furniture grew at a 6.4% (-5.9% y/y) rate following a like downturn during 2Q. Spending on clothing & shoes fell at a 1.5% (-5.1% y/y) rate while services spending gained a modest 1.8% (0.4% y/y).

In the fixed-investment side of the GDP accounts, residential spending also grew for the first time since 1Q'06. The 23.3% rise (-18.1% y/y) followed a 2Q decline of similar magnitude. During the downturn, which spanned three years, residential investment fell by more than one-half. Continuing to the downside at a 2.5% (-18.9% y/y) rate was business investment. The decline was led by a 9.0% (-20.8% y/y) drop in spending on structures though equipment spending rose a modest 1.1% (-17.9% y/y). That increase was led by a gain in transportation equipment spending (-47.2% y/y) and an upturn in information processing equipment & software (-6.4% y/y). Government investment rose at a 2.3% rate (1.8% y/y) led by a gain in defense spending (5.0% y/y).

Inventory accumulation made a positive contribution to GDP growth for just the second time in two years. The modest 0.9% addition followed subtractions of 1.4 and 2.4 percentage points during the prior two quarters.

For the first time in a year, deterioration in the foreign trade deficit lowered GDP growth. The 0.5 percentage point subtraction was due to a 16.3% (-14.9% y/y) rise in real imports which outpaced the 14.7% (-11.2% y/y) gain in exports.

The GDP price deflator rose a slim 0.8%. Though the PCE price index gained 2.8% (-0.6% y/y), the rise in the overall domestic final sales price index was held to just 1.6% (-1.0% y/y) as the fixed investment price index fell sharply (-2.5% y/y).

Chained 2005$, % AR 3Q '09 2Q '09 1Q '09 2Q Y/Y 2008 2007 2006
GDP 3.5 -0.7 -6.4 -2.3 0.4 2.1 2.7
  Inventory Effect 0.9 -1.4 -2.4 -1.2 -0.4 -0.4 0.1
Final Sales 2.6 0.7 -4.1 -1.5 0.8 2.5 2.6
Foreign Trade Effect -0.5 1.7 2.6 0.9 -1.2 0.8 0.1
Domestic Final Demand 3.0 -0.9 -6.4 -2.4 -0.4 1.7 2.5
Chained GDP Price Index 0.8 -0.0 1.9 0.7 2.1 2.9 3.3
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