GDP growth overstates economy’s tepid strength

By Josh Bivens

moneyThe Bureau of Economic Analysis reported that U.S. gross domestic product (GDP) — the broadest measure of economic activity — grew at an annualized rate of 3.0 percent in the third quarter of this year, roughly on par with the 3.1 percent growth rate in the previous quarter.

This growth was a bit larger than most forecasters predicted, with large positive contributions from (often volatile) inventory investments and a fall in imports seemingly overcoming the negative drag expected from hurricanes Harvey and Irma.

However, final sales to domestic purchasers—a measure of domestic demand growth that strips out the volatile component of inventories—grew substantially more slowly this quarter (1.8 percent), and this number seems like the more informative one about the underlying strength of the U.S. economy’s expansion: slow but almost exactly in line with the entire post Great Recession period.

All in all, today’s report is consistent with an economy that has steadily improved since mid-2009, with the pace of improvement too-slow but steady.

One important data point from today’s report is that a key measure of inflation (the “core” price deflator for personal consumption expenditures, which subtracts out volatile food and energy prices) continued to actively decelerate; growing at 1.1 percent over the past 12 months compared to last quarter’s reading of 1.2 percent.

This is well below the Federal Reserve’s preferred 2 percent target.

This signals strongly that while the economy continues to slowly improve, there is no danger of too-rapid growth leading to overheating and policymakers should let the expansion continue without trying to rein in its pace.


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