Ed Dolan's Econ Blog

US Q3 GDP Revised Sharply Upward; Corporate Profits, NGDP also Rise

According to figures released today by the Bureau of Economic Analysis, U.S. real GDP increased at a 2.7 percent annual rate during the third quarter of 2012. That was up sharply from the 2.0 percent advance estimate released last month, and up even more from the 1.3 percent reported for Q2.

Two factors accounted for the upward revision to Q3 GDP growth. The first was an increase in private non-farm inventories, large enough to offset a substantial drought-driven decrease in farm inventories. As a result, the total contribution of investment to GDP growth increased to 0.86 percentage points, up from just 0.07 percentage points reported in the advance estimate. Changes in inventories are volatile and notoriously hard to interpret. Inventory increases can be a good sign if they reflect planned stocking up for expected future sales, or a bad sign if they represent goods piling up in stores and warehouses because sales are less than previously expected.

The other strong element in today’s report was an upward revision of exports. They are now estimated to have contributed 0.16 percentage points to growth, compared to a reported -0.23 percentage point decrease in the advance estimate. True, 0.14 percent is still feeble, well below the figures regularly reported for most of the recovery. Still, they wipe out the worrisome decrease of the advance estimate, which would have been the first recorded since the first quarter of 2009.

The consumption component of GDP growth was revised downward slightly, from 1.42 percentage points in the advance estimate to 0.99 percentage points today. The contribution of government was virtually unchanged at 0.67 percent. Most of that, as previously reported in the advance estimate, was an increase in defense spending. Federal non-defense spending barely increased, while state and local spending fell slightly, continuing a long contraction.

Today’s release also included an estimate of corporate profits. The broadest measure, corporate profits with inventory valuation and capital consumption adjustments, rose to a record high of 1.99 trillion dollars in nominal terms. That put the share of profits in GDP just below the all-time record high reached in the fourth quarter of last year. Profits after tax also rose.

Finally, the BEA reported that nominal GDP grew by 5.5 percent in the third quarter, up from 5.0 percent in the advance estimate. That is the strongest rate since the beginning of the recovery. The news will hearten economists who favor NGDP growth as a target for monetary policy. It is the strongest NGDP growth since the beginning of the recovery, and only the second time NGDP has grown significantly faster than its long-run trend. We can hope that this is the beginning of a trend, and that the Fed’s expansionary policies will take hold.

3 Responses to “US Q3 GDP Revised Sharply Upward; Corporate Profits, NGDP also Rise”

ThomasGrennesNovember 30th, 2012 at 4:27 pm

To place the U.S. data in context, Reuters today announced slower than expected real growth in Brazil. It also reports slower than expected growth (slowest in a decade) in India and Russia. Chinese growth is now expected to be the slowest in 13 years. The BRICs are slowing down, and the Eurozone is in recession. These global forces are not
favorable for further U.S. growth.

ThomasGrennesDecember 1st, 2012 at 9:04 am

Yes, both trading partners and Americans will be interested in how current and expected
future decisions about taxes, spending, and debt will influence the fragile economic recovery in the U.S. The crucial fiscal issues include both the approaching "fiscal cliff" and the longer-term debt issues. In the presence of globalization, prudent decisions by one government can benefit partner countries as well.