Jump in government spending also boosted GDP growth. But surging Imports, falling residential fixed investments, and inventories dragged.
By Wolf Richter for WOLF STREET.
Our drunken sailors, as we’ve come to call them lovingly and facetiously, were at it again, and they splurged on goods in particular, but also on services, and they accounted for 69% of GDP, and they moved the GDP needle, driven by big increases in income, and they saved the rest.
A much smaller group of drunken sailors – the really drunken sailors at the federal government – also dug deeply into their pockets to spend money, but they had to borrow a bunch of it, thereby further ballooning the national debt and driving the debt-to-GDP ratio higher.
What dragged on GDP: The trade deficit worsened further, driven by rampant consumer spending and expected consumer spending on goods, a portion of which are imported. Companies were front-loading imports for the holiday season to not get caught up in a potentially long strike at East Coast ports. Slower growth in private inventory investment also dragged on GDP.
So, GDP, adjusted for inflation (“real GDP”), grew by an annualized rate of 2.8% in Q3 from Q2, well above the 15-year prepandemic average of 2.0%, according to the Bureau of Economic Analysis today. By comparison, in Q2, GDP grew by 3.0%, and in Q1 by 1.6%. Year-over-year, GDP grew by 2.7%.
By major category, adjusted for inflation, in annual rates:
- Consumer spending (69% of GDP): +3.7%, an acceleration from Q2 (+2.8%), driven by a 8.1% surge in spending on durable goods.
- Private fixed investment (18% of GDP): +1.3%, a deceleration from Q2 (+2.3%) and from Q1 (+6.5%), dragged down by a drop in residential fixed investment.
- Government consumption and investment (17% of GDP): +5.0%, an acceleration from Q2 (+3.1%). Federal government +9.7%, driven by a surge in defense spending. State and local government +2.3%.
- Change in private inventories investment dragged on GDP growth, after adding to it in Q2.
- Trade deficit worsened for the third consecutive quarter, on surging imports to meet strong US demand for durable goods. Imports drag on GDP. Exports add to GDP.
“Real” GDP in dollar terms, adjusted for inflation and expressed in 2017 dollars, rose to $23.4 trillion annualized in Q3. A month ago, the BEA heavily revised upward the prior years of GDP, consumer income, consumer spending, and the savings rate. The blue line shows GDP before that revision:
The actual size of the US economy: “Current-dollar” GDP (not adjusted for inflation and expressed in current dollars) rose by 4.9%, to $29.4 trillion annualized. This is the amount we use for the US debt-to-GDP ratio here further down.
Consumer spending on goods and services rose by 3.7% in Q3 from Q2 annualized and adjusted for inflation, the fastest rate of growth since Q1 2023, and the second fastest since Q4 2021, powered by phenomenal spending growth on durable goods.
- Services: +2.6%.
- Durable goods: +8.1%, driven by motor vehicles.
- Nondurable goods: +4.9%.
Retail sales data – sales of goods, not services – released earlier in October, including large up-revisions of prior months, pointed the way with a three-month annualized growth rate, not adjusted for inflation, of 7.0%.
Consumer spending – personal consumption expenditures, as they’re called officially – accounted for 69% of GDP.
Private Fixed investment rose by 1.3%, annualized and adjusted for inflation, decelerating from the prior two quarters (Q2 +2.3%, Q1 +6.5%). Of which:
- Residential fixed investment: -5.1%, second consecutive quarter of declines.
- Nonresidential fixed investments: +3.3%, a deceleration from prior quarters (+3.9% in Q2, +4.5% in Q1):
- Structures: -4.0%, first decline since 2021.
- Equipment: +11.1%
- Intellectual property products (software, movies, etc.): +0.6%.
Government consumption expenditures and gross investment jumped by 5.0% annualized and adjusted for inflation, a further acceleration from Q2 (+3.1%) and Q1 (+1.8%).
Federal, state, and local government consumption and investment accounts for 17% of GDP (with state and local governments accounting for 61% of total government spending, and the federal government accounting for 39%).
This does not include interest payments, and it does not include transfer payments (the biggest part of which are Social Security payments), which are counted in GDP if and when consumers and businesses spend these funds or invest them in fixed investments.
- State and local governments: +2.3%.
- Federal government: +9.7%, compared to Q2 (+4.3%) and Q1 (-0.4%.
- National Defense +14.9%.
- Nondefense +3.2%.
Consumers v. Governments. Consumer spending accounts for 69% of GDP, and the percentage increase moves the needle much more than the combined federal, state, and local government spending (which accounts for only 17% of GDP) because it comes off a much larger base.
Personal consumption expenditures (+3.0%) contributed 2.46 percentage points to the GDP growth of 2.8%.
Federal, state, and local, government consumption expenditures and investment (+5.0%) contributed only 0.85 percentage points to the GDP growth of 2.8%.
This chart shows both, consumer spending (blue) and government spending (red) in inflation-adjusted dollars at annual rates. Remember that big parts of government spending, including interest expense, do not enter into GDP and economic growth. They only enter indirectly if and when the recipients spend them or invest them in fixed investments:
The Trade Deficit (“net exports”) in goods & services worsened further for the third consecutive quarter:
- Exports: +8.9%, to $2.63 trillion. Added 0.94 percentage points to GDP growth.
- Imports: +11.2%, to $3.71 trillion. Subtracted 1.49 percentage points of GDP growth.
- Net exports (exports minus imports) worsened to -$1.08 trillion and subtracted 0.55 percentage points from GDP growth
The Debt-to-GDP ratio worsened a tad to 120.8% in Q3 because the gross national debt in current dollars (not adjusted for inflation) grew even faster than GDP in current dollars (not adjusted for inflation). By contrast, in Q2, GDP had grown a little faster than the debt, and the Debt-to-GDP ratio had dipped a little. For the past four quarters, the debt-to-GDP ratio hovered at just over 120%, despite the strong economy:
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
I saw a lot of these drunken sailors at the last CU boulder. Thankfully everything at that game was free for those of us in the box from the invite.
best of luck to all them sailors as this ships keeps sailing.
Maybe higher tariffs on manufactured goods is an idea who time has come.
That idea came a long time ago, but it’s really hard for anyone, including Trump — he only partially succeeded in 2016-2020 — to implement them because there is so much resistance to tariffs in corporate America and from stockholders because they got so rich off those imports (offshoring production to cheap labor countries to boost profit margins), Walmart and Apple at the very top of the list. And they have recruited armies of economists to constantly attack tariffs from all directions.
Tariffs are a direct tax on the profit margins of foreign producers and US importers. And maybe they can pass some of them on to end users, but that’s not guaranteed if local competition keeps prices down, in which case tariffs are just a tax on foreign producers and US importers. And this country needs to raise taxes, and tariffs is about the best way of raising tax receipts, much better than taxing incomes. With taxes you have to choose the lesser evil, and tariffs are the lesser evil.
There are some readers here who live in other countries, and for them, US tariffs are always a terrible idea because these people in other countries have gotten rich off the US trade deficits. So let them hate tariffs all they want.
“(offshoring production to cheap labor countries to boost profit margins)”
Wolf – this is nothing new – in the 60’s pharmaceuticals went to the Carribean; electronics did it in the 70’s and 80’s before they went to asia.
The lower cost of labor offset the cost of shipping – and frankly having managed a factory in Mexico, the labor force was reliable and the quality was on par with US factory.
Question for the labor unions: what did you think was going to happen when you negotiated higher wages – might be good in short term to appease workers but lost jobs in the long term?
We’re now paying the price for three decades of the failed free-trade dogma.
China and other countries were the ones that benefited, along with US corporations.
Imagine that tariffs are up, income taxes removed. I’m certain that most of the tariffs will be paid by end users. Acting something similar to what we have in Canada: sales taxes (GST/PST), on only foreign goods. But the new prices feeds inflation directly (unlike in Canada). In Canada the tax is paid only once at the post of sale. Not on every step in the production/business pipe (like tariffs).
Now, from the government point of view, the more imports the better. This could be quite a strong force to encourage imports.
And there is so much more to it.
You got this backwards.
Sales taxes are different from tariffs in that you cannot escape sales taxes, but you can and do escape tariffs by producing in the US.
That’s the either-or purpose of tariffs: either pay taxes or produce locally. So tariffs ENCOURAGE local production and DISCOURAGE imports, and if you want to import anyway, you pay the tax. It’s not rocket science.
Example. Production of widget A. By local production, the taxman gets total $X. But the A has a huge tariff Y. If Y >> X then the money talks. All I’m saying is that there is a double sword incentive. Just noting it, that’s all.
And forget that “eliminate income taxes” bullshit. That’s just idiotic. No one is going to do that, ever, it doesn’t matter what they say or want. It cannot happen and won’t happen. No one can stop the sun from rising either, and it doesn’t matter what they say or want.
All income taxes combined account for over 96% of total federal tax receipts. Tariffs account for 1.8%. You can triple the tariffs, which would be a LOT, and they’ll account for only about 5% of total tax receipts. No one is going to eliminate the remaining 95% of tax receipts. That stuff is just idiotic bullshit.
Hi Wolf,
Don’t tariffs allow US manufacturers to raise their prices to match the costs of imported products? In theory, US producers should benefit from selling cheaper goods. But I recently read an article about US companies raising their prices to maximize their profits against the newly set tariff prices—akin to raising plywood prices when a hurricane is about to hit.
As a result, US consumers don’t directly benefit from the tariffs.
Is my logic correct?
@Kentucky:
I agree with your logic. Domestic producers can and will raise their prices to just below prices of imported products, so consumers will really not benefit from tariffs. They will not leave money on the table.
The other argument that economists have against tariffs is that the domestic manufacturers will not have much compulsion to innovate and produce better products.
So consumers will suffer both from higher-prices as well as lesser quality.
This is exactly where we are heading in the EV space where tariffs are being levied to very high levels on imports.
“tariffs allow US manufacturers to raise their prices to match the costs of imported products?”
No. Tariffs don’t allow anything. The lack of competition does.
If there is only one producer in the US, or an oligopoly, yes. Which is why monopolies and oligopolies are so bad and in theory are targeted either for regulation or prosecution by trust busters.
If there is vibrant local competition, they will compete on price to gain or maintain market share, and profit margins are then limited. If someone tries to raise prices to match tariffed imports, they will lose sales, and eventually they’ll have to cut prices or vanish.
Wolf, that’s a very good analysis of the idea of raising tariffs., hadn’t seen that thought process before.
Thank you.
Now the classic rebuttal by economists against this idea is the Smoot Hawley tariffs which purportedly sent the world into the Great Depression.
I’d like your thoughts on this
Exactly.
Tariffs are stupid. Be careful what you ask for. Free trade has made this country very rich.
It made the poor richer than …
Some tariffs are good when foreign companies are subsidized by their governments to sell below market price to remove competition by taking market share. Once the completion is gone, they can increase the price.
It happens all the time.
Does the U S government subsidies any business or like this chip program or are they Laissez-faire?
Increasing tariffs during a period of low unemployment and elevated inflation doesn’t seem like it would be very politically palatable, yet here we are. Tariffs amount to an immediate tax on consumers. Newer tariffs have been in place for some time now and I’m not aware of any impact on localization and reduction of imports. Maybe long run there could be some domestic investment to fight it, but I haven’t seen it.
Lets keep this party going!
Raging Everything Mania, fueled by “the most reckless FED ever.”
No. The Federal Reserve is very conservative and has been shrinking the money supply in the US for years with QT. Blame crazed manic speculators for prices, not the Federal Reserve.
@SoCalBeachDude: After doing QE and Zirp for close to 3 decades and printing trillions of dollars during Covid, the Fed has just mopped up a small portion of it with its QT the last couple of years.
Why do you think that the economy is doing so well in spite of the tightening for the last couple of years? It is like someone pouring 100,000 barrels of oil in the fire and trying to put it out with water from a fire truck.
You can say that they have done something to redeem themselves a tad bit but saying that they are “very conservative” is laughable.
Further, several Fed governors have spoken about the wealth effect on the economy. By holding down interest rates and paving the way for stock and housing market speculation, the Fed fully intended to keep the bubbles going. Sure, “crazed manic speculators” are present, but by and large there have not been any sensible investment alternatives available for prudent investors.
You have been repeating this view for quite some time, I don’t know why. But it clearly doesn’t pass the small test.
“The most reckless FED ever.” I think that title has now been officially retired around here. Plus from all that benefitted from seeing their home value rocket beyond their wildest wet dreams or seeing they can do no wrong on Mag 7 stock with every downturn becoming another buy the dip before resuming rocket course to Mars, is the FED truly reckless in their eyes or are they the greatest in wealth generation?
Judging by the way most sailors are still on a never-ending drinking binge, if they care to know who Pow Pow is, they probably will say he is doing a decent or great job. With another cut, most normies will probably think he is excellent at his job.
no one disputes that powell has been great for the top 1% who own a disproportionate share of assets. not so much for the middle and working classes, however.
Isn’t it incredible how money printing and absurd government deficits benefit everyone?
(except the young, middle class, and working class – but those people don’t count)
And I am one of the few that is slowing down on adding to the partying because I am past my personal expiration date by a few years and don’t need more stuff.
Maybe I should dump my current ride and buy a new C8 Z06 while I still can get in and out of it without too much help?
Do it, C8 Z06 is a hell of a car. That engine sound is intoxicating, plus if you look around, especially out of state, you can find MY24 for $5k – $10K below MSRP. Quite a different dynamic than just a year or two ago when people are paying $10K and over MSRP to buy one…yeah people are just smart and rational or perhaps just too drunk and rich to care paying over sticker
It is sobering to reflect that in a $23.5-trillion dollar economy, a single company like Apple or Microsoft can be worth one trillion buckeroos in their own right.
It just goes to show that if you have a garage and some ingenuity stewing around in your back pocket, convince your folks to let you tinker. If you’re anything like Jeff Bezos’ parents (now fabulously wealthy) they’ll thank you.
DX 1M might test Sept 2022 high (recession), before plunging to the 80’s (inflation, higher CL).
If a state government pays a contractor $10 million for road repair, facility construction, etc., that’s government spending, but when the contractor hires a subcontractor for $1 million, that’s private sector spending, right?
If the whole project is $10 million and got counted in GDP as $10 million, how it then gets split up is irrelevant, including labor and materials. The $1 million the subcontractor got doesn’t get counted again. It’s already part of the $10 million.
Should we be concerned about that debt to GDP ratio…?
No. Not yet. There are other countries that are worse. They will be the canary in the coal mine. When they start having problems…..it might even be good for the USD. Sort of hard to believe.
That consumer spending chart is crazy. Up 5 trillion since 2010. When 70% of the economy is consumer spending….wow. No wonder the stock markets are rocking.
I think the economy could use some tax increases to slow deficit spending but you do not get elected or reelected raising taxes.
…and you don’t get re/elected by slashing spending, either.
Seems like problem of incentives.
Hi Wolf. You have covered the industry in the past. I am just curious.
I saw Carvana stock popped after earnings today. I have not looked at this earnings yet but in May, they said GPU was $6500. In comparison, Carmax was $2500. How does Carvana do so much better than Carmax or maybe I am missing something?
May, 2024
Carvana = Record Q1 Total Gross Profit per Unit (“GPU”) of $6,432 (+$2,129 YoY) and Non-GAAP Total GPU of $6,802 (+$2,006 YoY)
Today, 2024
Total gross profit per unit (“GPU”) was $7,427, an increase of $1,475
Sept, 2024
Carmax = Gross profit per retail used unit of $2,269 and gross profit per wholesale unit of $975, both in line with last year. Extended Protection Plan (EPP) margin growth of $69 per retail unit to $575 and service margin growth of $84 per retail unit from the prior year’s second quarter.
I was looking at an older investor presentation from Carvana this year and they are projecting over $7000 GPU going forward.