Numbers and Their Meaning

The U.S. economy is complex. Most people want to sum it up in one simple number: real GDP growth. However, that estimate has a number of flaws. Typically, there’s more going on under the surface in any government data report. The last several quarters of GDP growth are a good example.

Real GDP rose 1.3% over the four quarters ending in 2Q16, but that understated the economy’s strength. A slowdown in inventory growth subtracted 0.6 percentage point and a wider trade deficit subtracted 0.2 percentage point. Underlying domestic demand was more like 2.1% (+2.3% if you also subtract the government sector). This flipped in 3Q16. A faster pace of inventory growth added 0.6 percentage point, while a narrower trade deficit added 0.8 percentage point. Ex-foreign trade and inventories, domestic economic growth was more like 1.4%, about half of the headline GDP growth figure (+2.9%). In other words, the economy was not as strong as the 3Q16 GDP growth figure would suggest, nor was it as weak as the 2Q15-2Q16 GDP data would seem to imply.

The third quarter GDP numbers will be revised (and revised again), but the story is unlikely to change much. Note that there is a fair amount of choppiness quarter to quarter, which may reflect difficulties in the seasonal adjustment (and the possibility that the seasonal pattern is changing more rapidly over time).

Inflation-adjusted consumer spending growth was weaker than anticipated in 3Q16, and the quarterly data imply either a weak figure for September, or downward revisions to July and August. While slower than in 2Q16, the 3Q16 pace was moderately strong. Yet, there appears to have been some loss of momentum in consumer spending. Some of that may reflect caution amid election-year uncertainty. Consumer attitude surveys suggest some concern regarding the overall economy, but continued optimism in personal finances.