The Surprises Inside the GDP Stunner


The U.S. economic recovery appears to be chugging along at a much faster pace than anyone expected. Witness the advance third-quarter figures on gross domestic product released by the Commerce Dept. on Oct. 30. Real GDP (adjusted for inflation) posted a stunning 7.2% growth rate in the quarter, which was stronger than the 5.8% gain that we at MMS International had anticipated. The chain price index, which is used to adjust the GDP number for inflation, posted a 1.7% gain in the quarter, which was also stronger than expected.

The upside surprise in the headline number was heavily concentrated in business investment, particularly in the inventory investment figures. Indeed, our forecast for the quarter was predicated on much stronger assumptions for the business inventory component. Inventories were reported to have contracted at "only" a $35.8 billion rate in the third quarter, vs. the hefty $59 billion rate we had assumed from the inventory data for the first two months of the quarter. Inventories ended up subtracting slightly less than one percentage point from the third-quarter growth rate -- a much more muted impact than we had expected -- thereby contributing to the better-than-expected headline figure.

The noninventory data, referred to as "final sales," grew at a 7.8% rate, which was almost identical to our 7.7% estimate. Within the report's sales components, the real grabbers were a 15.4% surge in equipment and software investment and a 20.4% growth rate for residential construction.

ANOTHER BIG NUMBER? Amid all the upbeat data were some downside surprises: "Only" a 6.6% growth rate for personal consumption, due to a weak 2.2% pickup in services and a sharp slowing in government spending growth to just 1.3%.

However, one encouraging notion can be drawn from the report: Even if consumers -- who kept the economy growing while Corporate America pulled in its horns -- aren't willing to open their wallets as wide as some economists expected, businesses may finally be ready to pick up the spending slack.

We at MMS expect another big number in the fourth quarter, despite the upside third-quarter surprise in inventories that some analysts might "take out of" their fourth-quarter estimates. We have marginally lowered our fourth-quarter GDP estimate, but we still project 5% GDP growth in both the fourth quarter and first quarter of 2004 -- with notable upside possibilities to those forecasts. And our estimates still sharply exceed recent consensus forecasts of roughly 4% growth.

It's worth noting that gains in line with our estimates will leave fourth-quarter real GDP growth, on a year-over-year basis, of 4.2% in both 2003 and 2004, which should translate to at least a modest downtrend in the unemployment rate and to net job creation. Indeed, payroll acceleration is likely imminent. From MMS International staff analysts


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