GDP Growth Returns in Q3

As expected, the economy grew at a healthy pace in the third quarter, expanding at a 3.5% annual pace according to this morning’s data from the Bureau of Economic Analysis.

Among the highlights:

  • Consumer spending grew at a 3.4% pace, the fastest since the first quarter of 2007. A substantial fraction of that growth reflects vehicle purchases, which were temporarily boosted by the cash-for-clunkers program.
  • Residential investment grew for the first time since late 2005, driven in part by the tax credit for new homebuyers.
  • Imports rose for the first time in two years. Most of that increase came from goods, which is consistent with the idea that auto imports increased in response to cash-for-clunkers.

You may notice a trend here, as government policies had a significant effect on the pattern of growth in the third quarter.

As I’ve mentioned before, I think one of the best ways to understand the pattern of growth is to look at the contributions that each major sector made to the overall growth rate:

As you can see, consumers, inventories, and exports were the main drivers of Q3 growth, while imports were the main drag.

Q3 represents a striking change from Q2 (shown in the next chart), when the economy contracted at a 0.7% pace and private spending was weak across the board:

Note: If the idea of contributions to GDP growth is new to you, here’s a quick primer on how to understand these figures. Consumer spending makes up about 70% of the economy. Consumer spending rose at a 3.4% pace in the third quarter. Putting those figures together, we say that consumer spending contributed about 2.4 percentage points (70% x 3.4%, allowing for some rounding) to third quarter growth.

About Donald Marron 294 Articles

Donald Marron is an economist in the Washington, DC area. He currently speaks, writes, and consults about economic, budget, and financial issues.

From 2002 to early 2009, he served in various senior positions in the White House and Congress including: * Member of the President’s Council of Economic Advisers (CEA) * Acting Director of the Congressional Budget Office (CBO) * Executive Director of Congress’s Joint Economic Committee (JEC)

Before his government service, Donald had a varied career as a professor, consultant, and entrepreneur. In the mid-1990s, he taught economics and finance at the University of Chicago Graduate School of Business. He then spent about a year-and-a-half managing large antitrust cases (e.g., Pepsi vs. Coke) at Charles River Associates in Washington, DC. After that, he took the plunge into the world of new ventures, serving as Chief Financial Officer of a health care software start-up in Austin, TX. After that fascinating experience, he started his career in public service.

Donald received his Ph.D. in Economics from the Massachusetts Institute of Technology and his B.A. in Mathematics a couple miles down the road at Harvard.

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