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Economy in Brief

Q3 GDP Growth Revised Down Due To Domestic Demand & Foreign Trade
by Tom Moeller November 24, 2009

The second estimate of 3Q U.S. economic growth was lowered from the advance report due to slower growth in domestic demand and greater deterioration in the foreign trade deficit. The revision to 2.4% from 3.5% was greater than expectations for a lessening to 2.9%. Nevertheless, growth last quarter was the first positive figure since 4Q 2007.

Accompanying the GDP figure was the first estimate of 3Q corporate profits. The 10.6% rise versus 2Q was the third consecutive quarterly increase and diminished the y/y decline to 6.7% from -25.1% at its worst in 4Q' 08. Lower market interest rates lifted earnings in the financial sector by more than one-third (25.4% y/y) and they tripled from year-end '08. Earnings from the rest of the world increased 6.7% (-19.1% y/y) while the end of the recession raised domestic nonfinancial profits by 2.0% (-12.5% y/y) for the second quarterly increase.

Deterioration in the foreign trade deficit subtracted a greater 0.8 percentage points from 3Q GDP growth after an initially estimated 0.5% subtraction. Import growth was increased to 20.8% (-14.1% y/y) yet the gain in exports also was revised up to 17.0% (-10.8% y/y).

Domestic final demand growth also was revised down to 2.7% from 3.0%. Real PCE growth was revised down to 2.9% (-0.1% y/y) from 3.1% as the Cash for Clunkers sales program gave slightly less lift to vehicle sales as estimated earlier. Elsewhere, personal consumption of furniture grew at an unrevised  6.3% (-5.9% y/y) rate but the decline in spending on clothing & shoes was halved to 0.7% (-5.0% y/y). Services spending gained a slightly reduced 1.0% (0.4% y/y).

On the fixed-investment side of the GDP accounts, the quarterly rise in residential spending was slightly reduced to 19.5% (-18.8% y/y). Business investment also fell at a slightly increased 4.1% (-19.3% y/y) rate. Government investment rose at an increased 3.1% rate (2.0% y/y) led by an 8.9% gain in defense spending (5.2% y/y).

The addition to 3Q growth in GDP from inventories was unchanged at 0.9 percentage points. The addition followed subtractions of 1.4 and 2.4 percentage points during the prior two quarters, and was just the second positive contribution to GDP growth in two years.

The gain in the GDP price deflator was lowered slightly to 0.5%. The PCE price index was ticked lower to 2.7% (-0.7% y/y) and the rise in the overall domestic final sales price index was brought down to 1.5% (-1.0% y/y).· The U.S. National Income & Product Account data are available in Haver's USECON and the USNA databases.

Can the Term Spread Predict Output Growth and Recessions? A Survey of the Literature from the Federal Reserve Bank of St. Louis is available here.

Chained 2005$, % AR 3Q '09 Preliminary 3Q '09 Advance 2Q '09 1Q '09 2Q Y/Y 2008 2007 2006
GDP 2.4 3.5 -0.7 -6.4 -2.5 0.4 2.1 2.7
  Inventory Effect 0.9 0.9 -1.4 -2.4 -1.2 -0.4 -0.4 0.1
Final Sales 1.9 2.6 0.7 -4.1 -1.6 0.8 2.5 2.6
  Foreign Trade Effect -0.8 -0.5 1.7 2.6 0.8 -1.2 0.8 0.1
Domestic Final Demand 2.7 3.0 -0.9 -6.4 -2.4 -0.4 1.7 2.5
Chained GDP Price Index 0.5 0.8 -0.0 1.9 0.6 2.1 2.9 3.3
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