US Third Quarter GDP Revised to 0.5% Decline

Last month, the Commerce Department announced that the US economy declined by 0.3% in third quarter 2008. Yesterday, it revised that figure downward to 0.5%. This change is important because it suggests the economy is in a bigger hole that originally thought. That also means that when fourth quarter results are available early next year, the country will find that this situation meets the official definition of a recession, two consecutive quarters of negative economic growth.

The culprit here was consumer spending. This should come as no surprise as people were losing, or feared losing, their jobs. In addition, those who wanted credit couldn't get a loan to save their lives. As a result, MarketWatch.com reported, “Consumer spending declined 3.7% in the third quarter, revised from a 3.1% decline. This is the first drop in consumer spending in 17 years and the largest in 28 years. Consumer spending subtracted 2.7 percentage points versus third-quarter growth. Spending on durable goods decreased 3.7%, while spending on nondurable goods fell 15.2% and spending on services fell 6.9%.”

The government also revised the personal income growth for both second and third quarter 2008. The results are telling. Personal disposable incomes were up 10.7% in the quarter ended June 30, 2008, as a result of the economic stimulus package in the first part of the year. For the quarter ended September 30, 2008, disposable personal incomes fell by 9.2%

Looking ahead, fourth quarter 2008 appears to be even weaker than the third. Consensus figures suggest that the annual rate of decline is likely to hit 4%. A note to clients from RBS Greenwich Capital warned, "As bad as the third quarter was, the fourth quarter will undoubtedly be worse." That's because corporate profits are down, and therefore, businesses are not as likely to spend to expand. They're trying to save to survive.

Even the good news in the report isn't all that good. Sales of exports were up 3.4%, which is good. However, that was a downward revision from 5.9% and quite a ways down from th 12.3% growth rate in the second quarter. With overseas markets feeling the arrival of recession, or at least decelerated growth, demand for US goods and services will slide in the fourth quarter.

One wonders why Mr. Obama ever wanted the job. He's about to inherit the most daunting “in-tray” anyone has ever seen.

© Copyright 2008 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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