The much-awaited and hoped-for slowdown in the second half turned into a drunken party in Q3.
By Wolf Richter for WOLF STREET.
This was Fed Chair Jerome Powell’s reaction this morning when he saw the Q3 GDP report, as captured by cartoonist Marco Ricolli for WOLF STREET:
In Q3, all our drunken sailors where at it together in one huge party – consumers, businesses, and governments. Maybe they’ll slow down in Q4, maybe they’ll slow down in 2024, or whenever. But in Q3, they drank directly from the punch bowl.
GDP, adjusted for inflation (“real GDP”), jumped by an annualized rate of 4.9% in Q3 from Q2, following the 2.1% increase in Q2 and the 2.2% increase in Q1, according to the Bureau of Economic Analysis today.
All major categories, except the trade deficit (which worsened), increased sharply, adjusted for inflation:
- Consumer spending (69% of GDP): +4.0%.
- Gross private investment (18% of GDP): +8.4%.
- Government spending (17% of GDP): +4.6%.
- Private inventories increased and added to GDP.
- But the trade deficit got a little more horrible and an bigger drag on GDP.
Obviously, as we can see from the chart, big increases are generally followed by smaller increases, or sometimes quarter-to-quarter dips. And that history of quarter-to-quarter changes alone, without knowing anything about Q4 yet, would lead us to expect a smaller increase in Q4. That doesn’t mean the economy suddenly hit an air pocket, but that growth reverts to trend.
GDP in dollar terms: In current dollars, not adjusted for inflation, “nominal GDP” jumped by 8.5%, to $27.6 trillion annualized. This represents the actual size of the US economy, measured in today’s dollars.
GDP adjusted for inflation via 2017 dollars rose 4.0% to an annual rate of $22.5 trillion, depicted in the chart below. You can see the sharp acceleration of growth in Q3. All figures below are adjusted for inflation via 2017 dollars.
Drunken sailors #1: Consumer spending on goods and services jumped by 4.0% annualized and adjusted for inflation, after the revised 0.8% increase in Q2 and the 3.8% increase in Q1. Consumer spending accounted for 69% of Q3 GDP.
- Spending on goods jumped by 4.8%, including a 7.6% spike in durable goods (think autos).
- Spending on services jumped by 3.6%.
Drunken sailors #2: Gross private domestic investment spiked by 8.4%, after the 5.2% jump in Q2. It accounted for 18% of GDP.
The fixed investment component within gross private domestic investment ticked up 0.8%, of which:
- Residential fixed investment: +3.9%, after six quarters of declines.
- Nonresidential fixed investments: -0.1%, after seven quarters of increases:
- Structures: +1.6%.
- Equipment: -3.8%.
- Intellectual property products (software, movies, etc.): +2.6%.
Drunken sailors #3, oh my: Government consumption and investment jumped by 4.6% to a new record. In total, it accounted for 17% of Q3 GDP.
Q3 was the fifth quarter in a row of steep increases, driven by the most recklessly drunken sailor of them all, the federal government, which is now blowing borrowed money helter-skelter in every direction.
- Federal government: +6.2% (national defense +8.0%, nondefense +3.9%).
- State and local governments: +3.7%.
Government consumption and investment does not include transfer payments and other direct payments to consumers (stimulus payments, unemployment payments, Social Security payments, etc.), which are counted in GDP when consumers and businesses spend or invest these funds.
The Trade Deficit (“net exports”) in goods & services got a little more horrible:
- Exports: +6.2%.
- Imports: +5.7%.
Imports subtract from GDP. Exports add to GDP. Imports is a much larger dollar figure than exports (hence the trade deficit) and therefore the 5.7% increase in imports was in dollars larger than the 6.2% increase in exports, and thereby the trade deficit worsened.
The historic stimulus-driven buying binge of goods in the US during the pandemic caused the trade deficit to totally blow out. Over the past six quarters, it recovered a little, but not nearly enough:
Change in private inventories added 1.3 percentage points to GDP. Changes in inventories count as a business investment. Inventories rose in Q3, to $2.94 trillion, in inflation-adjusted dollars. You can see the inventory shortages that ended in the second half of 2022, when restocking efforts began to bear fruit:
In Q3, all our drunken sailors had a blast. The much-awaited slowdown in the second half has turned into a drunken party in Q3. Maybe Q4 will finally bring some sense to the drunken sailors and cause them to sober up. But that may be wishful thinking, and the party may go on. It’s not hard to see that inflation isn’t going to just vanish in this environment. When business investment takes off like this, and when government spending, particularly at the federal level takes off like this, and when consumers are blowing their big pay increases and their newly discovered interest income left and right, a slowdown is just hard to imagine. What is easier to imagine in this scenario is more persistent inflation and therefore higher for longer interest rates.
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