Advance Estimate of Q3 GDP Growth Disappoints

Reasonable people might believe that an increase in GDP annualized growth from 2.5 percent in the second quarter to 2.8 percent in the third quarter was good news for the economy.

They would be wrong.

Sometimes an increase in GDP growth is bad news.

The 2.8 percent annualized growth rate for the third quarter—based, of course, on preliminary data—reflects an addition of 0.83 percentage points to inventories. This means that businesses will be drawing down those inventories in the fourth quarter, rather than increasing production for consumer and business use.

Both personal consumption and business investment slowed, not a good sign for the economy. Personal consumption grew by 1.5 percent, less than its 1.8 percent growth rate in the second quarter. Business investment grew by 1.6 percent in the third quarter, compared to 4.7 percent in the second quarter. Residential investment picked up slightly, to 14.6 percent in the third quarter compared to 14.2 percent in the second quarter, but this sector is highly dependent on low interest rates and government subsidies. The government sector grew slightly, due to increases in state and local government investment.

The advance GDP release shows that Congress and the president need to work together stimulate growth. The least expensive way to do this is by reforming regulations that impede business development and job creation. Republicans and Democrats in Congress appear to be stalled on comprehensive tax reform and immigration reform, potential drivers of GDP growth, but the executive branch has the power to reform regulations on its own.