This past week, the overall economic growth for the third quarter was reported at a lackluster rate of 1.5%. While this number was essentially in line with expectations, it does reflect an economy that is not particularly strong.
It should be noted that the economic growth figures being mentioned are after adjusting for inflation. That would be like someone receiving a 3% salary increase with inflation at 1.5%, then their real wage increase would be 1.5%.
This report also continues a pattern during this economic recovery of growth starting to improve, only to later slow down. During the second quarter of the year economic growth was at a decent 3.9% pace, well above the 1.5% rate for the just completed quarter. Some fluctuation in growth on a quarter to quarter basis is normal, however, economic growth over the past twelve months was only 2.0%.
While news reports will tend to emphasize the headline number, it is useful to look at the individual components of the GDP (Gross Domestic Product) report. The largest category is consumption, which reflects consumer spending, and that increased at a 3.2% rate. This implies that consumers are still spending at a reasonably healthy pace.
The category that detracted the most from GDP growth was a slowdown in inventory accumulation. The change in inventories reduced GDP growth by 1.4%, as GDP would have been 2.9% without the inventory change.
There are a couple of ways to interpret the change in inventory levels. Inventory levels do bounce around on a quarter to quarter basis, so some change is just normal fluctuations.
However, those taking a more pessimistic perspective would argue that businesses are being more cautious about future consumer spending. My best guess is that it is a combination of those two factors.
Some people might wonder about the significance of GDP growth. Generally people are most concerned about their jobs, and what their future employment prospects might be like.
The importance of economic growth is that it ultimately determines a society’s standard of living. When economic growth is better, productivity is increasing at a faster rate, which in turn will impact wages. Population growth also has a role in the economic growth figures. If the economy is growing 3% per year, with 1% population growth, then the growth rate on a per capita basis is 2%.
This period of slower economic growth is not something that has just happened. It has been occurring over the past 15 years, as economic growth has just averaged around 2% over that time period. In prior decades growth was more often in the 3 to 4% range.
The slowdown in economic growth does explain a good portion of the reason why wages have tended to stagnate in recent years. There are other factors that have influenced salaries, such as employers health care costs increasing, and the impact of globalization on wages.
This sluggishness in economic growth is not unique to our country, but is also prevalent in other mature economies. Much of Europe and Japan have been growing at slower rates than the U.S. in recent years.
Slower economic growth also impacts corporate profits. While many companies have been successful at reducing costs, ultimately revenues will need to increase for companies to have decent earnings growth.
For the fourth quarter of the year economic growth should be a little higher, assuming inventory levels stabilize and consumers maintain their spending.
Looking beyond this year economic growth will probably stay at similar levels unless we start to see major increases in productivity.