GDP

As expected, growth in the US contracted for the the first time since the third quarter of 2007, when it fell -0.2%, and the most since the 2001 recession. Real GDP fell -0.3% QoQ annualized (consensus -0.5%) in the 3rd quarter of 2008. This compares to growth of +2.8% in the 2nd quarter. This preliminary data will be revised again in November and December as more data becomes available. Over the past year, real GDP growth has slowed to +0.8% YoY, down from +2.1% YoY in the 2nd quarter.

The weakness was broad-based. Exports (+5.9% QoQ annualized) and inventories were supports to growth. If they are excluded, real GDP would have fallen an even larger -1.8%. Gross private investment fell -1.9%, the smallest decline in a year. Fixed investment fell -5.6% with residential investment easing by -19% and non-residential declining a more modest -1% in the quarter. Government spending rose +5.8%, with defense spending surging to +18% from +7% the prior two quarters.

Personal consumption was a huge detractor from growth in the third quarter. Personal consumption fell even more than expected, declining by -3.1% (consensus -2.4%, prior +1.2%). This was the first quarterly decline in spending since 1991, and the largest quarterly decline since 1980 when Volcker was hiking rates at the Fed to squash inflation. Durable goods spending fell a huge -14% quarterly annualized. Spending on non-durable goods fell -6.4%, the largest decline since 1950! The report also showed that inflation adjusted disposable income fell -8.7%, the most since records began in 1947. The impact was due to the timing of the rebate checks from the stimulus program which boosted the prior quarter by +11.9%

Record imported oil prices helped push the quarterly annualized growth in the GDP inflation deflator to 4.2% from 1.1% in the second quarter (consensus had looked for an increase of 4%). This was the largest rise in 17 years. The core PCE grew at a higher than expected +2.9% QoQ annualized pace, the fastest pace in 2 years. Consensus had looked for an increase to 2.5% from the 2.2% level in the second quarter.