San José State University
Department of Economics
Thayer Watkins
Silicon Valley
& Tornado Alley

The Performance of the U.S. Economy
in the Third Quarter of 2012

The Bureau of Economic Analysis of the U.S. Department of Commerce released its first estimate of the Gross Domestic Product (GDP) of the U.S. for the third quarter of 2012. According to those estimates the U.S. grew in real terms by $67.7 billion in the third quarter of 2012 over its second quarter level. Both GDP's are measured in 2005 prices. This is a rate of increase of 0.5 of 1% per quarter compared to the 0.3 of 1% it grew in the second quarter over its level in the first quarter. If those rates of growth continued for a full year the rates would be 1.3% and 2.0%, respectively. The Obama Administration took heart in this seeming improvement in the economy. An examination of where this seeming improvement came from indicates that there is no basis for considering the economy as improving.

Here are the statistics for the changes in the second and third quarters over their previous quarters.

The Quarterly Changes in the Components of
National Demand and Production
Component Change from
2012I to 2012II
Billions $2005
Change from
2012II to 2012III
Billions $2005
Gross domestic product 42.1 67.7
Personal consumption
35.7 47.8
     Goods 2.8 36.5
         Durable goods -0.8 27.6
         Nondurable goods 3.1 12.6
     Services 32.3 12.7
Gross private
domestic investment
3.3 2.5
     Fixed investment 20 7
         Nonresidential 12.9 -4.7
             Structures 0.5 -3.9
             Equipment and software 13.2 0
         Residential 7.2 12.3
     Change in private inventories -15.5 -7.3
Net exports of goods and services 8.1 -6.3
Exports 23.4 -7.5
     Goods 22 -11.6
     Services 1.5 4
Imports 15.4 -1.3
     Goods 13.1 -6.3
     Services 2.2 5.2
-4.3 22.4
     Federal -0.6 23.7
         National defense -0.3 21.1
         Nondefense -0.3 2.5
     State and local -3.7 -0.4
Residual -1.8 -3

The big increase came in U.S. Federal Government purchases for national defense. Here is the graph of the time series for such expenditures.

The above table shows that private domestic investment is generally not doing well. One crucial factor for the economy is the investment by businesses in plant and equipment. This is included in the above table as structures and equipment and software.

This crucial element of demand for U.S. output is apparently headed toward a peak and thereafter will decline.

Another component of investment demand is the investment in inventory. If this figure is negative it means that businesses are selling off inventory and not replacing it. As the graph below shows this is a component of demand which is collapsing.

Another key item of demand for U.S. output is exports. Here is the time series on changes in export demand.

The table previously shown had a large increase for consumer expenditures for durable goods. This is not unusual. As the graph below shows consumer demand for durable goods typically has a substantial quarterly increase.

The increases for recent quarters have been substantial but notably lower than the increases in 2010. It is also interesting to note that according to the Bureau of Economic Analysis,

Real disposable income decreased less than 0.1 percent in September,
compared with a decrease of 0.3 percent in August.

Thus, if there had not been an extraordinary increase in Federal Defense spending, the perception of the economy would have been one of collapse; a collapse in investment in plant and equipment, a collapse of inventory investment and a collapse in export demand for U.S. products.

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