Third Quarter GDP Estimate Falls

The second GDP release for the third quarter points toward continued economic expansion in the near term, but with growth that is below the economy's potential. Certainly the deep downturn in consumer spending is over, which is contributing to a recovery. The fiscal and monetary stimulus is boosting demand. Also pointing to continued growth over the next few quarters are a rebound in homebuilding and a stabilization in business investment. Inventories fell in the third quarter, but at a slower pace, adding to GDP growth. And inventories will be a strong plus for growth over the next couple of quarters as firms start to add to their stocks in order to meet stronger demand. Stronger demand from overseas is boosting exports.

However, consumers remain anxious, and a rising unemployment rate will restrain the rebound in household spending. Profits are increasing, but more than 90% of the gain in the third quarter came from financial corporations. Nonfinancial profits did increase, for the second straight quarter, but the gain was small. Until nonfinancial corporate profit growth picks up, firms will be reluctant to invest and hire.

Real GDP growth is expected to be around 2% in 2010, below the economy's potential. This means the unemployment rate will continue to rise, peaking at close to 11% in the third quarter of next year. Economic growth will pick up in the second half of 2010, however, and then accelerate. Real GDP will expand 4% in 2011 and 5% in 2012. This will help bring down the unemployment rate as firms hire to meet stronger demand.