gross domestic product (GDP) arrived on Oct. 29. The headline number may have come as a bit of a disappointment to Bush partisans: output of goods and services in the U.S. economy rose 3.7% -- below economists' median forecast of a 4.3% rise -- vs. the 3.3% final growth rate in the second quarter.
But we at Action Economics believe the data were solid, and there is little reason to view the overall report as disappointing. True, the third-quarter gain fell short of expectations. But the downside surprise was largely concentrated in government spending, which grew at only a 1.4% clip in the third quarter, following small back-to-back gains of only 2.5% in the first quarter and 2.2% in the second.
The shortfall will probably prompt economists to boost their government spending estimates for the fourth quarter of 2004 and the first quarter of 2005, so the headline weakness should have little impact on the overall outlook.
ROBUST SPENDING. Most of the remaining data in the third-quarter release was in line with expectations, or even stronger than expected. Perhaps most importantly, real consumption spending posted growth of 4.6% -- exactly in line with expectations and undeniably robust. A stronger trajectory for the service component of the spending figure bodes well for the fourth quarter.
Another positive was fixed investment, which was better than expected, with an 8.5% gain following the 13.9% increase in the second quarter. The upside surprise was in the equipment and software component, which grew at a 14.9% pace, following a 14.2% rise in the second quarter. Commercial construction growth was disappointing, registering a mere 1.4%, but the larger equipment component more than made up for the shortfall. Residential investment posted a 3.1% growth rate, in line with forecasts.
Imports provided another small downside surprise for GDP, though these figures reflect assumptions by the Bureau of Economic Analysis for September, and we will need to see the final goods and services report for the third quarter to really know if this will stick. The official import figure is 7.7%, vs. our prior 5.8% estimate. Export growth was exactly as expected at 5.1% in the third quarter, and net exports were hence fairly close to expected, subtracting $17.7 billion, or 0.6%, from GDP for the quarter.
INFLATION SLUMBERS. Business inventories were only slightly weaker than expected, with a $13 billion subtraction (0.5%) to GDP, leaving an accumulation rate of $48.1 billion. This estimate will also prove sensitive to the September business inventory reports, as inventories may well have been disrupted by the barrage of hurricanes that month.
Finally, the report contained some good news on the inflation front. The overall chain-price index posted a surprisingly small 1.3% growth rate in the third quarter, which actually fell short of already-low market estimates. Clearly, the gain was held back by the absence of "pass through" of oil-import price gains to domestic prices. This was attributable to both energy price restraint at home, and a coincident sharp downtrend in food prices alongside weather-related weakness in apparel prices. The personal consumption expenditures (PCE) "core" chain-price index rose only 0.7% -- the lowest growth rate since 1962.
While oil-price strength continues to threaten the outlook, it is impressive how well the economy has held up with oil at $55 per barrel. We continue to assume that oil prices will subside from current highs, thereby providing further fuel to the economy in the fourth quarter and first quarter of next year. Englund is chief economist, and MacDonald global director of investment research and analysis, for Action Economics