Gross Domestic Product (GDP) is the broadest measure of aggregate economic activity and encompasses every sector of the economy. Why Investors Care
| Released on 10/30/08 For Q3 Advance 2008 | |||||||||||||||||||||||||
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Highlights
Third quarter GDP is confirming that the U.S. economy is in recession. The Commerce Department's initial estimate for third quarter GDP came in at minus 0.3 and followed a 2.8 percent boost the prior quarter. The latest number was marginally higher than the consensus forecast for a 0.5 percent decline.
The drop in growth was due to a fall in personal consumption, weaker residential investment, a decline in nonresidential fixed investment, slower growth in exports, and a less negative import decline. On the positive side, inventories fell less rapidly and government purchases accelerated.
The third quarter decline was the first negative number since a 0.2 percent dip in the final quarter of 2007 and was the largest since a 1.4 percent drop in the third quarter of 2001.
On the inflation front, the GDP price index jumped to an annualized 4.2 percent from 1.1 percent in the second quarter. The market had projected a 3.8 percent increase. Headline PCE inflation is still reflecting higher oil prices for the quarterly average with a surge to 5.4 percent annualized after a 4.3 percent jump in the second quarter. Core PCE inflation rose 2.9 percent, compared to 2.2 percent the previous quarter.
Year-on-year growth for real GDP stood at 0.8 percent and is down sharply from 2.1 percent in the second quarter.
Today's report shows the economy in recession and given the retrenchment in the consumer sector the contraction is likely to continue for one or two additional quarters. The markets had already baked in a marginally worse number and today's news theoretically should have no impact. But the reality of a negative number for GDP could weigh more heavily on the markets than a forecast.
GDP for the second quarter came in with a final estimate of 2.8 percent. On the inflation front, the GDP price index was an annualized 1.1 percent - an extremely low number due largely to a quirk in how surging imports (related to oil prices in the second quarter) are a negative for nominal GDP, the numerator for the GDP price index. Headline PCE inflation stood at an annualized 4.3 percent while core PCE inflation came in at 2.2 percent. But for the initial estimates for the third quarter, both real growth and PCE inflation are likely to be down from the second quarter and possibly even negative. Monthly real sector data have been negative while we have had very favorable CPI numbers due to lower energy prices.
Real GDP Consensus Forecast for advance Q3 08: -0.5 percent annual rate
Range: -2.0 to +2.7 percent annual rate
GDP price index Consensus Forecast for advance Q3 08: +3.8 percent annual rate
Range: +3.0 to +4.9 percent annual rate
![[Chart]](chart.gif)
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Real GDP growth is always quoted at a quarterly annual rate. It measures how much the economy has grown over a three-month period. Quarterly growth rates are often volatile; consequently, economists also like to look at the year-over-year growth in GDP. The yearly changes tend to be more stable. |
![[Chart]](chart_1.gif)
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It is common to compare quarterly changes at annual rates in the GDP price index. These can be volatile, just like the quarterly swings in real GDP growth; as a result, the trend in inflation is better determined by year- over- year changes. |
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