Explaining the U.S. Growth Spurt in Five Charts

The U.S. economy overdelivered in the third quarter, to use business jargon, producing an annual growth rate of 4.1 percent. How did this happen? This series of five charts breaks down the contributions to growth. The numbers come straight out of the tables that the Commerce Department’s Bureau of Economic Analysis presented today in its “final” estimate of growth in the July-September quarter. (I put final in quotes because there will be future revisions.)

The first thing to notice is that the biggest contributor was what the government calls “gross private domestic investment.” That includes construction, purchases of machinery and software, and accumulation of inventories that can be sold in future quarters. We’ll see in one of the charts below where most of that increase came from.

Personal consumption expenditures were the second-biggest contributor to GDP growth. That’s spending on both goods, from cars, to clothes, to computers, and services, such as movies and haircuts.

Then came net exports. That’s exports minus imports—in other words, the trade balance. The trade balance can contribute to GDP growth even if there’s a deficit, as long as the deficit is smaller than it was before.

The final contribution, a tiny one, was government. That’s spending by the government on salaries and purchases. It doesn’t include transfers, such as Social Security and Medicare, which show up instead in the personal consumption expenditures category when the money is spent.

Now let’s break down each of the Big Four.

Most of the contribution from personal consumption expenditures came from goods, and most of the contribution from goods was from durable goods, such as cars and washing machines. Less came from nondurable goods, such as groceries. Services provided a smaller contribution.

This shows that the bulk of the contribution from gross private domestic investment came from a change in private inventories. Companies added to their stockpiles at a faster pace than they had in previous quarters. This can be taken either as a bullish sign of business confidence or as a bearish signal that businesses will have to throttle back production to clear their shelves.

Imports cut into GDP growth in the third quarter. That might seem obvious, because any U.S. demand that’s satisfied with imports means the goods being consumed weren’t produced in the U.S. But imports can still be a contributor to GDP if they’re smaller than they were in previous quarters. That didn’t happen this time.

Lastly, government. The federal government’s contribution to GDP in the third quarter was slightly negative but was more than offset by a positive contribution from state and local governments, which are collectively larger than the federal government.

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