Q3 GDP Posts First Gain AfterMore-Than Year Long Recession

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).

The EU Commission indices made their eight largest advance Since October 1988 for the EU region as a whole. This boosted the overall index for the EU to the 46th percentile of range much closer to its midpoint but still 14% below its average level for the same period.

Surprisingly in relative terms it is the consumer that is boosting the region the most. Consumer confidence stands at the 50% mark of its range. Construction lags the most of all sectors, standing in the 17th percentile of its range followed by services that languish in the 31st percentile of their range. Both retailing and the industrial sector are in their respective 41st percentiles.

As to countries, the large countries are clustered closely together in their respective range readings. Spain is the weakest in the 38th percentile of its range. Compared to the UK in the 47th range percentile; among EMU members Italy is the relative strongest in its 42nd percentile leaving a small gap between the best reading and the worst among large countries in the e-Zone.

Still if we look at the rankings by queue the results are much weaker. The range ranking positions the current reading between the highest and lowest range values. The queue orders the various readings by component or country depending on its application. It ranks them presenting the result as a percentage (100 is highest). The queue percentiles show that while the various indicators have come sharply up from their lows and some although some are closing in on range midpoints the ranked readings are still no where near normal.

The overall EU reading that stands in the 46th percentile of its range also stands in the 11th percentile of its queue – a terribly low standing. The real message here is that yes there is a significant recovery from the lows in gear but the current levels of the indices are still well below normal.

While the EU and EMU regions are making progress there is still a very long way to go.

The trend toward improvement in the job market continued this month. The Labor Department indicated that initial claims for unemployment insurance held roughly steady w/w at 530,000. The figures are down moderately from an average of 549,000 claims during September and are down sharply from the peak reached in March of 674,000 claims. The four-week moving average of claims fell to 526,250 while the latest weekly figure was slightly higher than Consensus expectations for 521,000 claims.

The largest increases in initial claims during the week ending October 17 were in California (+5,774, +12.6% y/y), Puerto Rico (+685, +52.9% y/y), Minnesota (+614, +38.8% y/y), Nevada (+366, 8.7% y/y ), and Nebraska (+239, -1.6% y/y), while the largest decreases were in Wisconsin (-5,681, +29.5%), New York (-4,711, +15.5% y/y), Pennsylvania (-4,033, +28.2% y/y), Illinois (-3,870, +44.9% y/y), and Oregon (-2,706, -16.6% y/y).

Continuing claims for unemployment insurance during the latest week fell 148,000 to their lowest level since late-March. The decline reflects the improved job market but may also be a function of the exhaustion of benefits. Continuing claims provide an indication of workers' ability to find employment. The four-week average of continuing claims fell modestly to 5,960,750 and have fallen 12.0% from their peak. This series dates back to 1966.

Extended benefits for unemployment insurance fell slightly for the first decline in seven weeks. The prior week's level was revised up. Through early-October extended benefits averaged 551,381.

The insured rate of unemployment slipped again to 4.4%, from an unrevised 4.5%, and matched its lowest since late-March. The rate reached a high of 5.2% during late-June. During the last ten years, there has been a 93% correlation between the level of the insured unemployment rate and the overall rate of unemployment published by the Bureau of Labor Statistics.

The lowest insured unemployment rates during the week ending October 9 were in North Dakota (1.1%), South Dakota (1.1), Virginia (2.0), Wyoming (2.4), Maine (2.4), Texas (2.6), Colorado (2.9), Minnesota (3.0), Maryland (3.1), Mississippi (3.5), New York (3.5), Florida (3.7), and Georgia (3.8). The highest insured unemployment rates were in Puerto Rico (6.3), Oregon (5.3), Nevada (5.3), Pennsylvania (5.0), California (4.6), Michigan (4.6), Wisconsin (4.8), North Carolina (4.5), South Carolina (4.5), and Washington (4.3).

The unemployment insurance claims data is available in Haver's WEEKLY database and the state data is in the REGIONW database.

Birth date, business cycles, and lifetime income from the U.S. Office of Management and Budget is available here.