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The big takeaway from third-quarter US GDP growth is that the economy grew about 100 basis points above potential GDP, while the personal consumption expenditure (PCE) price index advanced by only 1.5%. The only way to get this type of growth and inflation mix is with strong productivity growth. This is why it is important to look through the jobs data for October, which were affected by strikes, hurricanes and some seasonal anomalies. Don’t mistake the trick of the poor jobs for the treat that is a significant productivity boom.?
GDP
The US economy expanded at an annual rate of 2.8% in July-September. The above-potential GDP growth was achieved with minimal increases to prices in the quarter, with the PCE price index rising by a seasonally adjusted annual rate (SAAR) of 1.5%. GDP growth was driven higher by the US consumer increasing the pace of goods consumption and maintaining the pace of services consumption at a firm 2.6% SAAR. Capital expenditure was driven higher by a surge in information processing equipment, while government expenditure was driven up by military expenditure.?
It is important to distinguish between the path dependency elements of GDP and those that exhibit greater volatility, such as inventories or trade. In the face of falling interest rates and a slowing but still positive pace of jobs growth, we would expect consumption to grow at close to its 2.6% average pace of the past two years in 2025. Meanwhile, the Federal Reserve (Fed, the central bank) has the policy space to cut rates steadily over the next eight months, which should decisively uninvert the yield curve and spur bank lending to keep capital expenditure on equipment and intellectual property near 5%. The wildcard for 2025 will be the pace of productivity growth.??
Productivity
Since I wrote my National Association for Business Economics presidential address in October 2020 about how the pandemic had shocked the country into higher productivity, the data have outperformed. In the decade after the global financial crisis, productivity was especially low, as the economy was recovering from a balance-sheet recession, which meant that firms were focusing on debt repayment over investment. Meanwhile, households also worked to rebuild their balance sheets, which dampened consumption. The pandemic, and the resulting the low interest rates and reduced cost of travel and entertainment expenses allowed firms to refinance debt and build up a savings buffer. This has coincided with two important factors: a tremendous technology boom that firms are just beginning to deploy, and full employment. Productivity is growing at 2%, compared with 1.6% before the pandemic. This means that potential GDP could be much higher than the 1.8% that most economists, including those at the Fed, are now estimating. If potential GDP is closer to 2.5%, it means that 2025 GDP growth is likely to once again surprise to the upside.?
Jobs
Discerning the signal from the noise in the October jobs report takes experience. The number of people reporting that they could not work because of the weather surged to 512,000, which is the largest number reported since 1980. Although these people were counted as employed but not at work, it illustrates the magnitude of the problems with the October data. Likewise, strikes at Boeing also subtracted from the number. Manufacturing employment decreased by 46,000 in October, reflecting a decline of 44,000 in transport equipment manufacturing that was largely due to strike activity. If one looks at the three sectors that have dominated payroll gains over the past year–healthcare and education, state and local governments, and Leisure and hospitality–the first two grew in line with the six-month moving average. Furthermore, the diffusion index, which indicates the percentage of firms hiring, is solidly above the 50% mark at 55.6%, suggesting that one can look through the low print of 12,000 jobs added in October. Meanwhile, the unemployment rate remained steady at 4.1%, with only a tenth of a percentage point drop in the participation rate to 62.6%. All in all, although the headline gain of 12,000 jobs may look like a trick, the treat for the economy of full employment helping to drive a continued productivity boom remains in place.?
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