Thursday, October 30, 2008

It Will Be Ugly


Here are the key paragraphs from today’s GDP release for the third quarter

“Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- decreased at an annual rate of 0.3 percent in the third quarter of 2008, (that is, from the second quarter to the third quarter), according to advance estimates released by theBureau of Economic Analysis. In the second quarter, real GDP increased 2.8 percent……

“The decrease in real GDP in the third quarter primarily reflected negative contributions from personal consumption expenditures (PCE), residential fixed investment, and equipment and software that were largely offset by positive contributions from federal government spending, exports, private inventory investment, nonresidential structures, and state and local government spending. Imports, which are a subtraction in the calculation of GDP, decreased.

“Most of the major components contributed to the downturn in real GDP growth in the third quarter. The largest contributors were a sharp downturn in PCE for nondurable goods, a smaller decrease in imports, a larger decrease in PCE for durable goods, and a deceleration in exports. Notable offsets were an upturn in inventory investment and an acceleration in federal government spending.”

If you look at the tables accompanying the report you’ll see that personal consumption expenditures fell by 3.1% due to a 16.1% decline in durable-goods purchases and a 6.4% drop in nondurable-goods expenditures. Spending on services continued to grow.

This is cause for alarm because this report covers July, August and September, i.e. before the financial crisis hit. There’s every indication that consumer outlays have fallen into the deep freeze with the crisis’s advent. How low will these numbers plunge for the October, November and December quarter? Most likely response: It will be ugly.

© 2008 Michael B. Lehmann

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