3Q08 GDP Negative

Today the advanced GDP estimate for the third quarter was released from the Commerce Department. GDP is released three times- as an "advanced estimate", a "revised estimate" and a "final". Today's release is the advanced or rough, rough draft. It should come as no suprise to anyone that GDP contracted this quarter. The U.S. economy shrank at an annual rate of -0.3%, down from positive growth of 2.8% last quarter.

Recall in our discussion about 2Q GDP, that I predicted the second quarter's growth was an anomaly not to be trusted. Second quarter growth was indeed revised down from 3.3% to 2.8%, which is still higher than expected due to the strange inflation data they used. Remember that discussion?

Right. (<-isn't that Karl's trademark? Sorry). Moving on, 2Q used an absurdly low inflation number of just 1.3% and this quarter they used a more reasonable 4.1%.

On to the meat of the report, which is rancid. Last quarter we discussed how exports had surged, but it was unlikely to be sustainable. Export growth plunged from over 12% growth to under 6% this quarter. Most alarmingly, but not unexpected, was the fall in personal consumption. It fell from positive growth of 1.2% to contracting at a 3.1% annual rate. About the only growing part of GDP aside from exports was government spending which came almost entirely from defense spending.

Yet just like last quarter, the stock market rallied on today's news. GDP was expected to contract at -0.5% and the official number was "just" -0.3%. Before getting too excited, remember this is an estimated guess, so why quibble over 0.2%? The broadness of the economic weakness leads me to think things are going to get worse; as the Commerce Dept put it "most of the major components contributed to the downturn"- but I'm not here to predict.

If interested, the GDP report can be found here.