Q3 GDP Advances 3.5%; Non-Residential Investment Growth Stalls

Economic Pulse
October 30, 2014
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In Summary:

GDP for the third quarter showed continued momentum with a 3.5% annualized rate of growth—ahead of expectations, but behind last quarter’s 4.6% advance (Table 1). Gains in Q3 reflected positive contributions from federal government investment, which contributed 0.67 percentage points to the total quarter’s 3.5 percentage point gain, and from net exports, which added 1.32 percentage points to the quarter’s growth. Autos contributed almost 0.6 percentage points to growth—the largest positive contribution in ten quarters. Contributions from fixed investment were lackluster, however; gross domestic private investment, which includes residential and non-residential investment as well as the impact from inventories and investment in intellectual property, contributed only 0.17 percentage points this quarter, in contrast to Q2’s 2.87 positive percentage point impact. Spending was somewhat weak as well; goods consumption contributed 0.7 percentage points this quarter, down from Q2’s 1.33 percentage point contribution, despite a 4% annualized gain on the quarter in nominal employee compensation.

Table 1. Contributions to Real GDP, by Component (in percentage points)
Contributions to Real GDP, by Component
How Did Investment in Commercial Structures Fare?

In the first release of GDP for the quarter, investment in commercial structures and health care structures are grouped together, although office investment typically makes up 1/3 of total investment in the commercial/ health care category. Today’s results suggested a slowing from last quarter’s frenzied pace: Q3 2014 fixed investment in commercial and health care structures fell by an annualized -3.1%, as shown in Chart 1, although this follows a stellar 16.3% gain in Q2. As has been the case more recently, this category has proven to be quite volatile on a quarterly basis; year-todate, however, real investment in commercial structures and health care has risen by 6.6% annualized versus the first three quarters in 2013, suggesting a still-healthy pace of growth.

Chart 1. Real Investment in Commercial and Health Care Structures, Quarterly Annualized Percentage Change
Real Investment in Commercial and Health Care Structures, Quarterly Annualized Percentage Change

In a nod to the FOMC’s comment yesterday concerning inflation (“inflation in the near term will likely be held down by lower energy prices and other factors [and] the Committee judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year,”) the price index for core PCE—personal consumption expenditures excluding food and energy—fell to an annualized 1.4%; since 2012, the measure has been below 2% for nine of 11 quarters. Inflation, as well as gains in nominal wages, will be measures the Fed watches carefully, particularly since their concerns over the health of the labor market have faded somewhat.