The 7.2 percent gain in the third quarter was close enough to expectations that it is no big surprise. Productivity will have another monster quarter and so will profits. Now analysts are looking at the composition and details from the GDP announcement for clues about what lies ahead. Some of them, looking back at false starts during the past couple of years, worry that this will be another one.
Here is how I read the new evidence:
- Because mortgage refinancing and tax cuts helped produce the 6.6 percent gain in consumption in the quarter, some believe consumer spending will now run out of gas. I doubt it. Consumption will slow from this third quarter rate but there is little reason to think it will get so weak as to cripple the expansion. A steady rise in real wages—a welcome contrast to the weak employment picture—has for some time been a less recognized factor behind the strength in consumption and it should continue. Coupled with some long-awaited employment growth and a lagged response to the third quarter cuts, the outlook for the consumer is not bad—moderate growth, not stagnation or decline.
- Business fixed investment is picking up speed, led by computer purchases. The 15 percent rise in the third quarter was consistent with rising new orders. Investment is often a late starter recovery, and I would expect continued strength in coming quarters.
- Inventory liquidation held down the GDP advance, as it did in the second quarter. That is unlikely to go on. Inventory building should add to GDP growth in coming quarters, with only part of that effect offset as inventory building raises imports.
- The trade balance added to GDP as exports surged and imports were flat. As just noted, weak imports in part mirror the inventory liquidation in the quarter, with offsetting effects on GDP. But there is also an effect from the weaker dollar that should continue.
- The mysteries of Defense Department accounting produced no change in third quarter spending. Increases in future quarters are a reasonable guess.
- The inflation story will continue to keep the Federal Reserve Governors happy. Core inflation in the GDP deflator has averaged around 1.5 percent for many quarters, and averaged just 1.0 percent in the two most recent quarters. It should now quicken a bit. But the Fed has been going to great pains to indicate they want to encourage enough growth to produce employment gains and lower unemployment. Only an unwelcome acceleration of inflation would pose a conflict with that aim. And the latest evidence, from the GDP deflators and the hourly wage statistics, raise no danger flags.
Based on all of this, another good GDP rise in fourth quarter is likely, and there is nothing yet on the horizon to expect that the expansion will falter in 2004. It will be good for business and workers, but not good enough to give President Bush a gain in employment during the first term.