U.S. Economy Downward Revision to 3rd Quarter GDP

By: David_Urban

The National Bureau of Economic Research finally admitted the worst kept secret on Monday. The US economy fell into a recession in December 2007. Drilling down into the 3 rd quarter data can lead us to some interesting details.

To start, the revised 3 rd quarter GDP number showed a decrease of 0.5% and looks to be revised lower in the coming months. I would like to take a moment and look at a number of indices that are passed over by the press.

First is the price index for gross domestic purchases. This index measures prices paid by US residents rather than consumption and rose by 4.7% in the third quarter after rising 4.2% in the second quarter. Excluding food and energy, for those who use neither, the index rose by 3.0% and 2.2% respectively.

On the consumption side, real personal consumption expenditures decreased by 3.7% in the third quarter after rising by 1.2% in the second quarter.

The takeaway from here is that as prices continued to rise as consumers cut back their consumption on a faster level than prices rose by either trading down in terms of product quality or lowering the quantity of goods purchased. I see this as a serious retrenchment by the consumer which should continue into the next year.

Real federal government consumption expenditures and gross investment increased by 13.6% during the third quarter compared with 6.6% in the second quarter. Real state and local government consumption expenditures and gross investment increased by 0.8% compared with 2.5% in the second quarter.

My takeaway from the government data is that the stress and strain of the recession is being felt at the state and local level on a greater level than the federal level, due to the federal government's ability to print money. The problems at the state and local levels will continue through 2009 into 2010.

Presently, the federal government is the only leg holding the economy up. With the consumer, state, and local governments retrenching, federal government expenditures will need to be the crutch which keeps the economy from collapsing completely and hold the line until the consumer begins spending once again.

Next year should be a very difficult year at the state and local level with money printing authority limited to the federal government. Budgets and services will be slashed and consumer confidence will remain low as the economy begins to right itself and start to move forward, albeit slowly.

Source data: Bureau of Economic Analysis, Gross Domestic Deposit: Third Quarter 2008 (release date November 25, 2008

By David Urban

http://blog.myspace.com/global112

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