GDP Negative as Consumer Spending Falls 3.1%

The US economy is sinking fast. We did no need to see the GDP numbers to know that but the figures are out. Here are the Third Quarter 2008 Advance GDP Numbers.

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- decreased at an annual rate of 0.3 percent in the third quarter of 2008, (that is, from the second quarter to the third quarter), according to advance estimates released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 2.8 percent.

The decrease in real GDP in the third quarter primarily reflected negative contributions from personal consumption expenditures (PCE), residential fixed investment, and equipment and software that were largely offset by positive contributions from federal government spending, exports, private inventory investment, nonresidential structures, and state and local government spending. Imports, which are a subtraction in the calculation of GDP, decreased.

Most of the major components contributed to the downturn in real GDP growth in the third quarter. The largest contributors were a sharp downturn in PCE for nondurable goods, a smaller decrease in imports, a larger decrease in PCE for durable goods, and a deceleration in exports. Notable offsets were an upturn in inventory investment and an acceleration in federal government spending.

Final sales of computers contributed 0.06 percentage point to the third-quarter change in real GDP after contributing 0.17 percentage point to the second-quarter change. Motor vehicle output contributed 0.09 percentage point to the third-quarter change in real GDP after subtracting 1.01 percentage points from the second-quarter change.

Ridiculous Numbers

Notice how an "acceleration in federal government spending" made a positive contribution to GDP. All government spending, no matter how wasteful or unproductive, is assumed to provide a positive contribution to output.

Motor vehicles adding to GDP is absurd, as is final sales of computers. Computers are hedonically adjusted (all finished items are but computers are the worst offenders). For those not familiar with the term here is how it works. Computer are getting more powerful every year and prices are dropping as well. For example a computer today sells for $500 that would have cost $10,000 ten years ago. Even though the computer sells for $500, the government claims it sold for $10,000 (adjusted slowly over time).

This is preposterous and a huge reason why we were really in a recession long ago. The first 2% of GDP (my estimate) represents transactions that never took place at the price government claims.

GDP Shrinks at Fastest Pace Since 2001

Bloomberg is reporting
U.S. Economy: GDP Shrinks at Fastest Pace Since 2001

Gross domestic product contracted at a 0.3 percent pace from July to September, according to a Commerce Department report today in Washington.

"The crisis really kicked up in late September," Ethan Harris, co-head of U.S. economic research at Barclays Capital Inc. in New York, said in a Bloomberg Television interview. "We're going to be looking at a very unfriendly GDP number in the fourth quarter, with a drop of 2 to 4 percent."

Consumer spending dropped at a 3.1 percent annual pace, the first decline since 1991 and the biggest since 1980, after President Jimmy Carter imposed credit controls. The median forecast was for a 2.4 percent drop.

Unemployment is at a five-year high of 6.1 percent and may rise to 8 percent by end of 2009, according to Jan Hatzius, chief U.S. economist at Goldman, Sachs & Co. in New York. Consumer borrowing fell in August by the most on record as banks tightened credit. And the steep drop in the stock market so far this quarter has wiped about $2.8 trillion from investors' portfolios.

The report also showed what may be the last burst of inflation before the economic slowdown forces companies to limit price increases. The price gauge rose at a 4.2 percent pace last quarter, the biggest gain in 17 years. Costs tied to consumer spending and excluding food and energy, increased 2.9 percent, the most in two years.

The report also showed what may be the last burst of inflation before the economic slowdown forces companies to limit price increases. The price gauge rose at a 4.2 percent pace last quarter, the biggest gain in 17 years. Costs tied to consumer spending and excluding food and energy, increased 2.9 percent, the most in two years.

Unemployment Forecast 8%

I forecast unemployment to hit 8% in 2009 about a year ago. It seems everyone is latching on to that number now. I had 6% forecast for 2008 in December of last year when the rate was 4.7% or so. Unemployment is 6.1% now. Rather than picking a new target now, let's see what happens in the remaining few months of the year. It is clear my 6% figure for 2008 was too optimistic and so 8% in 2009 is likely to be too optimistic as well. Right now I expect unemployment will hit 6.5% or higher by the end of the year, and 6.8-7.0% is not out of the question. Certainly the numbers next Friday will be miserable. Congress will soon be talking jobs programs.

2009 rates to be a miserable time to find a job. Consumer spending is going to crash.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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