An In-Depth Look at the GDP Report

Let's start with the basics:

The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, private inventory investment, federal government spending, and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.

Here's an important point: yes, cash for clunkers was a big reason for the increase. But there were other contributors as well.

Real personal consumption expenditures increased 3.4 percent in the third quarter, in contrast to a decrease of 0.9 percent in the second. Durable goods increased 22.3 percent, in contrast to a decrease of 5.6 percent. The third-quarter increase largely reflected motor vehicle purchases under the Consumer Assistance to Recycle and Save Act of 2009 (popularly called, "Cash for Clunkers" Program). Nondurable goods increased 2.0 percent in the third quarter, in contrast to a decrease of 1.9 percent in the second. Services increased 1.2 percent, compared with an increase of 0.2 percent.

Yes, the cash for clunkers program was a big goose. But notice it wasn't just durable goods that saw increases: non-durable goods and services also increased. And not by small amounts. Also note the durable goods purchases by consumers only comprise 12% of PCEs. Services are by far the biggest component of PCEs, coming in at 65.7%. And non-durable goods comprise 21.9% of purchases. That makes the 1.2% increase in services and 2% increase in non-durables very important. The increase was broad-based.

Real nonresidential fixed investment decreased 2.5 percent in the third quarter, compared with a decrease of 9.6 percent in the second. Nonresidential structures decreased 9.0 percent, compared with a decrease of 17.3 percent. Equipment and software increased 1.1 percent, in contrast to a decrease of 4.9 percent. Real residential fixed investment increased 23.4 percent, in contrast to a decrease of 23.3 percent.

This is more good news for two reasons.

1) The rate of decline of non-residential fixed investment dropped at a smaller rate. We saw a slight increase in equipment and software investment.


2) Residential investment increased at a strong rate. Now I'm guess that some of that increase is the result of coming off a low bottom. But not all.

Real exports of goods and services increased 14.7 percent in the third quarter, in contrast to a decrease of 4.1 percent in the second. Real imports of goods and services increased 16.4 percent, in contrast to a decrease of 14.7 percent.

While imports increased at a larger rate than exports, exports were still up 14%. That tells us that our trading partners are buying things -- meaning they are recovering. The increase in imports indicates we're recovering.

Let's look at the GDP report from a different angle -- the percentage increase and what each component of GDP added to GDP growth.

First, GDP increased 3.5%.

Durable good sales added 1.01 of the 3.5% or 29% of the total increase. That number is the result of C4C. That number is also highly unusual -- meaning it is way out of the ordinary. The highest that number had been since the 4Q05 was .46 -- and that number was also out of the ordinary. Suffice it to say we're not going to get a goose like that from this number again.

Non-durable goods added .31 and services added .57. So combined these two other areas of growth were responsible for .88 of GDP growth, or 25%. This is why the broad based increase in PCEs (mentioned below) is so important. While car sales were a reason for the increase, they weren't the only reason.

Gross private domestic investment added 1.22 to the 3.5. The big movers there were positive contributions from the change in private inventories and increases in residential investment.

While exports did increase, imports also increased meaning we're back to imports subtracting from growth.

That leaves government spending which added .48 to the 3.5.

While C4C was a boost, it wasn't the only are that helped. There were other reasons for the increase.

Short version: this is a very good report.