The GDP report: Moderately bad, perhaps more than moderately misleading

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We finally got another quarter of negative GDP–the first since a year ago. The third-quarter number (-0.3%) will be revised as more data come in over the next couple of months, though, and economist Roger Kubarych of Italo-German superbank Unicredit (whose analysis was the first to land in my e-mail inbox) actually thinks it may go up.

But Kubarych is sure the fourth quarter will be bad bad bad, as is everyone else in economistland. Maury Harris at UBS predicts the economy will shrink at a 3.5% annualized pace in the fourth quarter.

Some numbers from today’s GDP report show why:

consumer spending, down at a 3.1% annualized pace (adjusted for inflation)

consumer spending on durable goods, down 14.1%

capital spending (nonresidential fixed investment), down 5.1%

disposable personal income, down 8.7%

What was up? Federal government spending, up 13.8%! Although most of that was due to a big gain in defense spending. Nondefense spending was up at only a 4.8% annual pace. That should change in the next coming quarters.

Oh, and after my post on the saving rate yesterday I should note that it is down, to 1.3%, from 2.7% in the second quarter.

Finally, it should be noted that you may want to ignore all the above numbers (except the savings rate, which is calculated using non-inflation-adjusted numbers) because they’re so tainted by the difficulty the government has been having in measuring inflation this year. As Kubarych’s colleague Harm Bandholz (I did not call Unicredit a superbank for nothing) explains:

According to the BEA, personal consumption expenditures for food subtracted an annualized 0.89pp from GDP growth (!) – that is the second largest subtraction since 1950 and is more than the 0.80pp drag from private consumption! We think that this odd figure was likely caused by flawed deflators. As nominal spending for food decreased an annualized 0.9%, the deflator for food expenditures soared another 7-3/4%.