UNPACKING THIRD QUARTER GDP

While we’ve been closely monitoring Federal Reserve (Fed) policy and geopolitics lately, we also remain focused more directly on economic growth. Recently, the Bureau of Economic Analysis reported its “advance” estimate of third quarter real gross domestic product (GDP), which expanded at an annualized rate of 1.9%. This reading was well ahead of expectations of 1.6% and slightly below the 2.0% growth rate in the second quarter. This is a positive result and is worthy of further analysis to understand if weaknesses are emerging. We’re very late in the current economic expansion, so such work is important.

Quarterly and Annual Trends 

Figure 1 shows the quarterly and annual trends for GDP over the last five years, including annual consensus forecasts for 2019 and 2020. Economic growth has remained positive, attributed more recently to a Fed that’s been accommodative by reducing the Fed funds rate. Figure 1 indicates inflation has remained at, and most often below, the Fed’s 2% target level, giving the Fed the room to cut rates. In late cycle, it is natural to be looking for signs of recession, so we’ll dig into the components of GDP to learn more. 

Components of GDP

Table 1 presents the primary components of GDP and includes the growth rate and contribution to total growth for each. To explain, the contribution to total growth columns combine to form the full growth rate of 1.9%. We see that the Private Investments component, which includes the business sector, contracted in the third quarter. Most market participants attribute this to a slowdown related to trade uncertainty and trade tariffs. 

The lower half of Table 1 also presents some components worth noting.

Consider the Structures component, which refers to products, usually buildings, that are put together at their permanent location and have long economic lives. Commercial buildings are a great example. A quarter-over-quarter growth rate of -15.3% is a meaningful decline. This segment alone shaved 0.5% off of GDP in the third quarter. Equipment, which includes transportation and industrial, also declined, in this case 3.8%, shaving another 0.2% off of GDP.

Building on a Strong Year

The Fed’s long-term, forward-looking GDP growth rate is forecasted to be around 1.9%. So at times when we experience stronger-than-average GDP growth, like the 3.1% rate in 2018, we should expect the economy to slow in future periods in order to absorb that positive growth, bringing us back toward the average. The now projected full-year 2019 GDP growth rate of 2.3% is in line with that expectation, and is, in fact, not far from the average expectations.

Future Implications

So, what can we infer about future GDP given this recent reading? First, the consumer remains a key driver of our economy. With consumer spending representing approximately two-thirds of GDP, consumer confidence remains important. Second, business activity definitely contracted in the third quarter, most likely related to trade uncertainty. We will continue to monitor trade, especially the U.S.-China trade negotiations, very carefully. A trade deal will almost certainly eliminate some of the uncertainty weighing on businesses.

And, as mentioned, we remain very late in the current economic cycle, so we’ll also continue to monitor for any other weaknesses in the economy that may signal a recession. But the third quarter remained positive, and we do expect the expansion to continue into 2020.

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