GDP estimate shows broad-based strength with 3.5% gain

October 30, 2014

WASHINGTON (10/31/14)--Seasonally adjusted annualized real gross domestic product (GDP) growth fell in the third quarter by 1.1% to 3.5%, according to an early estimate by the U.S. Department of Commerce.

The Bureau of Economic Analysis report released Thursday showed that the decline was largely attributed to decreased spending on inventories, which held back overall economic growth by 0.57%.

Decelerations of growth in fixed investment also contributed to the slowdown. Residential investment in the third quarter fell to 1.8% from 8.8% while nonresidential investment dropped to 5.5% from 9.7%.

The data does indicate, however, that the economic recovery is gaining momentum. Moody's analysts said that economic growth is "above trend" at almost 3%. In four of the last five quarters, real GDP has grown more than 3%, with recent broad-based monthly job gains averaging almost 225,000 ( Oct. 30). The ratings and research firm also noted that job openings have significantly increased since the start of year.

Contributing to growth in the third quarter were net-exports and government spending. The former, at 1.3%, was driven by a decrease in spending on imports, which fell by 1.7% after an 11.3% increase in the second quarter. The latter grew by 10%, up from 0.9% in the second quarter--pushed higher by a 16% increase in defense spending.

Moody's analysts said that government spending made its largest contribution to growth since 2009, potentially leading to higher numbers than expected. The Wall Street Journal had predicted that real GDP would increase in the third quarter by 3.1% (Oct. 30).

Almost mirroring the drop in real GDP growth was a fall in real disposable income. It fell from 2.7% to 4.4% despite a decrease in inflation growth to 1.2% from 2.3%.

The savings rate rose slightly by 0.1% to 5.4% while growth in real personal consumption expenditures fell to 1.8% from 2.5%.

The preliminary reading could be revised down when the BEA's second report on the third-quarter, based on more complete data, comes out Nov. 25. The Wall Street Journal pointed out that many Americans are barely seeing wage increases keep pace with inflation since the recession wiped out much of their wealth. The paper also noted that the Federal Reserve announced Wednesday that its quantitative easing program has been terminated. Economists, the Journal stated, could similarly dampen their outlook with economic woes in Europe and East Asia.