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The Bureau of Economic Analysis’s (BEA) first estimate of economic growth for the third quarter of this year shows an economy that continues to grow at a plodding pace.
According to BEA, the economy grew at 2.8 percent from July 1 through September 30. This was slightly faster than the 2.5 percent the economy grew in in the second quarter of the year.
The main driver of growth in the third quarter was increased investment, the strongest component of which was a sharp climb in business inventories. Inventory accumulation could mean either that businesses didn’t sell as much as they anticipated during the third quarter or that they ramped up production in anticipation of a busy fourth quarter. Time will tell which.
Personal consumption was also a large contributor to growth. Purchases of durable goods—such as cars and home furnishings—drove the growth in consumption.
This is BEA’s first estimate of growth in the third quarter, and subsequent estimates will change.
Updated estimates won’t change the fact that growth continues to be too slow. Compared to previous recoveries from steep recessions, it is clear growth should be much more robust at this point. For instance, after a comparable period following the steep 1981–1982 recession, growth averaged 3.5 percent annually. And that was after periods of growth that were three times stronger than what we’ve seen since the last recession ended.
The economy is struggling to grow at its potential largely because of the uncertainty caused by policy mistakes made in Washington over the past few years. The uncertainty caused by Obamacare, the Dodd–Frank financial reform law, the myriad of harmful environmental regulations, and the failure of Washington to address the oncoming debt crisis is making businesses reluctant to invest and add new workers.
The “sequester” spending cuts that have now been in place since March had little to no negative impact on growth in the third quarter—this despite constant claims to the contrary by those committed to maintaining the bloated size of government.
Reductions in government spending subtracted slightly from growth in the third quarter, but this is largely an accounting issue. That reduction will be erased, and likely reversed, once the private sector spends the money the government would’ve spent.
Many argue that the partial government shutdown in October and the debate about raising the debt limit will hurt growth. However, any negative impact would be short-lived, and those temporary effects won’t show until BEA releases data for the fourth quarter.
This latest economic update will undoubtedly begin a fresh round of hand-wringing about whether growth is strong enough to compel the Federal Reserve to begin to unwind (or “taper”) its quantitative easing (QE) program of buying unprecedented amounts of mortgage-backed securities and Treasury bonds.
Regardless of whether one believes QE is necessary to prop up the sagging economy or is unnecessary and too risky, the Fed must end its extraordinary purchases at some point. The question about when it will begin tapering is adding even more uncertainty for businesses and investors on top of that caused by other policy missteps.
That additional uncertainty is adding even more drag to the economy. This drag will remain on the economy until the Fed puts forth a more specific taper plan that markets are confident it will adhere firmly to.
Going forward, Americans should expect the economy to continue growing, albeit at an unacceptably slow pace. Until Washington alleviates the uncertainty it is inflicting on the economy, this will remain the case.
