Third Quarter 2010 U.S. GDP

This morning the results of the first pass at estimating gross domestic product for the third quarter just ended were released.  The U.S. economy grew 2.0% according to the Commerce Department.  This compares to a consensus expectation of 2.1% by economists.

For reference the second quarter GDP is now estimated to have been up 1.7%.

Analysis: As a former professional investment manager I can tell you that one of the miserable aspects of the job is that your performance is measured objectively, not subjectively.  At the end of the day it doesn’t matter whether or not you are a nice person, thorough in your analysis, or great at calculus.  No, what matters is whether or not you made money for somebody.  Well growth in “gross domestic product” is the same.  It doesn’t matter the political spin-doctoring, the intention of the Federal Reserve, the actions of businesses and business leaders, etc.  What matters is how fast did the damned thing grow!

The number is 2.0% for the third quarter.  Economists and business writers are going to call this anemic growth.  But honestly I don’t consider this growth to be that.  Why?  Certainly 2.0% growth is far less than the “economic” growth reported during the BOOM times.  But then that “boom” was more an explosion than a sonic boom.  That boom was created by monetary policy so loose that brothel employees blushed.  In other words, it wasn’t real economic growth.

As I have said many times before, real economic growth is finding better ways of doing something so that the same result is achieved with less resources.  Alternatively, real economic growth is creating something new that never existed before that is true innovation.  (See the Best of the Blog section if you want a full discussion of this topic.)  Right now productivity in the United States is running at about 2.0% as well.  So wouldn’t you expect economic growth to be about the same, too?  I do.

However, and this is a BIG however, economic growth is not high enough to lead businesses to creating new jobs.  And there’s the rub.  But then if you read this blog regularly you know that I have been predicting a long, slow climb out of this economic pit that we all dug for ourselves.  The good news is that the economy has grown enough in the past year – the official end of the recession – that we are almost back to the same level of economic output we were as the recession was beginning.  It just doesn’t feel that way…because of the unemployment mostly.

But lo (!) there is good news in the data.  Let’s drill down to the most significant part of today’s news…

Consumer spending was up 2.6%.  That figure compares to up 2.2% in the second quarter, and up 1.9% in the first quarter.  Can you see that consumer spending is accelerating?  In fact consumer spending is almost back up to the magic 3.0% level.  That level is magical because on average the U.S. economy historically has grown around 3.0%.  Consumer spending makes up 70% of economic growth on average.  The other portions of economic growth are: investments by business, government spending, exports, less imports.  So for GDP to be up 2.0% in the third quarter, yet consumer spending to be up 2.6%, means that consumers are doing more than their fair share of contribution.  What that means to me is that the “game of chicken” I have been describing for what seems like forever, is nearing a close.

Consumers are starting to spend at a rate faster than overall economic growth.  If that continues for even just one more quarter, businesses are going to have to start to increase wages and salaries, and maybe even hire new employees.  That’s because as the economy grows the excess capacity that has existed for awhile will disappear.  Eventually businesses will get to the point where they cannot service their customers because their is too much business relative to their ability to fulfill.  That results in hiring.

Lastly, I am very excited by the fact that not only is consumer spending growing, but the rate of change is accelerating, too.  In calculus, that’s the second derivative.  And right now the second derivative is positive.  That is a very good thing.  We also finally have three pertinent data points to evaluate.  And it looks good.

Importance grade:10; gross domestic product, gdp, is the grand pappy of all economic numbers.  It is the net result of everything that everyone in the economy does.  For the third quarter everyone’s choices and actions led to an increase in the economy of up 2.0%.  While less than everyone would like.  It is a sanefigure.  There is no irrational exuberance in the figure.  There is no irrational doom-saying in the figure.  Just the hangover like effects of having drunk at the monetary elixir spigot for a decade.  Hangovers are good.  They tell people: Next time drink in moderation.

Jason