Tuesday, November 30, 2004

The preliminary revisions to third quarter US GDP are released today, and it appears that Americans went even more hog wild on consumption than previously thought.
Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 3.9 percent in the third quarter of 2004, according to preliminary estimates released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 3.3 percent. . . .

The acceleration in real GDP growth in the third quarter primarily reflected an acceleration in PCE [personal consumption expenditures] and a deceleration in imports that were partly offset by a downturn in private inventory investment and a deceleration in residential fixed investment.
Or, cutting through the mild manner of the Department of Commerce, Reuters puts it all in proper focus.
Consumers ratcheted up their spending at a 5.1 percent annual rate, more than three times the 1.6 percent rate posted in the second quarter and the strongest since a 7 percent surge in the fourth quarter of 2001. Consumer spending accounts for more than two-thirds of the $11-trillion U.S. economy.
Let's pause to take in some of the massive spending that went on in 2004:III. Over the second quarter, nondurable goods consumption rose 4.8% and durable goods consumption rose a mighty 17.2%. Those seemingly never-ending car incentives certainly did the trick.

Revisions did tick the third quarter savings rate up to 0.5%, however, putting the savings rate for the year so far at 0.96%. Anything under 1% for the fourth quarter will ensure us our lowest rate since 1933. And Reuters calls this "healthy and sustainable growth"??

As consumption screamed ahead, investment in the built environment -- both in residential and non-residential structures -- slacked off markedly. The nonresidential structures investment numbers have bounced around greatly in a one-on one-off pattern; 2004:III was off, with investment changed -0.3%. More importantly, residential structural investment fell to its lowest level since 2001:IV, up just 1.7% in the quarter.

Defense spending continues to soar. After taking a one quarter breather, spending on tanks, bombs, military pay and the rest rose 9.8%. Since 2003:I, the quarter before the Iraq War began, defense spending is up 15% in real terms. Did somebody say "military Keynesianism"?

In comparison, during the early years of the Vietnam War, real defense spending rose 24% in real terms over the first six quarters of growth (1965:II to 1966:IV). Dubya is not quite up to LBJ's standards, but give this Texan another four years and he'll be there. Vietnam War spending peaked in 1968:I after eleven quarters of growth, but its most robust growth phase was over in seven quarters. That means George W. will be making up ground quite nicely in 2005.


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