GDP Grew 3.5% During Q3. What Does That Really Mean?


The Commerce Department today said the economy grew at 3.5% during the third quarter of this year. This is the first time that gross domestic product (GDP) has been positive since Q2 2008. It is also the fastest rate of growth since Q3 2007. According to Forbes:

Growth was driven by consumption, exports, federal government spending, home building and inventories. Consumption contributed 2.4% of the growth, with a particular boost in autos. Thanks to the Cash for Clunkers program, motor vehicle output added 1.66 percentage points to GDP. But even without this particular stimulus program, consumption improved and the economy grew nearly 2%, a swift turnaround from the first quarter of 2009 when the economy was shrinking at a 6.4% rate.

The U.S. economy grew in the third quarter for the first time in a year as consumer spending and investment in new home-building rebounded, data showed on Thursday, unofficially ending the worst recession in 70 years.

If you’re like me, and you suspect there’s some hot air behind these numbers, you’re not alone (Reuters):

Strip out Cash for Clunkers and 3Q GDP growth came in at 1.6 percent. Also strip out slowing inventory cuts and GDP would have been just 0.6 percent. Then you have a report that the WH has overestimated the number of jobs created by the stimulus.

Barry Ritholz assesses the conclusion that the GDP numbers mean an end to the Great Recession:

We begin looking at the NBER definition (of recession):

“A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades.” (emphasis added)

That definition raises an interesting question. If we look at the 5 factors NBER considers — GDP, real income, employment, industrial production, and wholesale-retail sales — its somewhat ambiguous to say unequivocally that the recession is over. We are still losing an inordinate number of jobs (250k+ / mo), industrial production has improved, but is soft, retail sales have been mostly flat, and real income has been negative for a decade.

Perhaps the bimodal definition the NBER uses is outdated: Read literally, their definition suggests that there are only two options, either the economy is expanding or contracting. It might be worthwhile to consider a third possibility: None of the above. The economy might have reached a state of stasis — a balance where it neither expands nor contracts.

Commenter IvoZ adds:

…if GDP is created by debt, then there are 2 possibilities:

1) Debt is used for increasing productivity or in a positive NPV project.

2) Debt is used for consumption. In this case we have negative capital formation. So we have positive GDP, but value is being destroyed (like eating away your capital). And people are cheering it, because – you see – GDP is positive!

Using GDP to measure economic performance is misleading in itself, even if GDP is properly calculated. Then add all the distortions of how GDP is calculated! Using GDP is like using an earnings or revenue number, while ignoring the balance sheet effects to achieve them.

The Wall Street Journal sums it up:

The economy is about to post growth numbers reminiscent of the good old days, otherwise known as the “old normal.” But a “new normal” of slower growth might be inevitable.

“New normal” might also include putting an end to recovery claims that don’t pan out.