In the third quarter of 2008, real Gross Domestic Product (GDP) decreased at an annual rate of 0.3 percent, according to the advance estimates released October 30 by the Bureau of Economic Analysis. This is the second time GDP growth turned negative in the past 12 months. The previous time was the fourth quarter of 2007, when real GDP decreased by 0.2 percent.

The chart below shows the contribution of various sectors of the economy to the GDP growth since 2006. 

In the third quarter of 2008, a fall in consumption, which accounts for about 70 percent of GDP, subtracted 2.25 percentage points from GDP growth. This is the first quarter with a decrease in consumption spending since 1991. 

Within consumption spending, durable goods purchases decreased most rapidly, by 14.1 percent. Spending decreased in all categories—motor vehicles, furniture and household equipment—with spending on motor vehicles seeing the largest drop. 

Spending on non-durable goods also decreased, with spending on food seeing the largest drop.

The fall in house prices continued to depress new residential construction. The decline in residential investment (“housing” on the chart) subtracted 0.72 percentage points from GDP growth this quarter. 

A fall in nonresidential business investment subtracted only 0.11 percentage points from growth. Within this category, a decrease in spending on equipment (mostly industrial and transportation equipment) was almost completely offset by an increase in spending on nonresidential structures. The final part of nonresidential business investment, inventories, decreased this quarter, but at a slower pace than in the preceding quarter.  This usually means that firms faced slower sales. This change in private inventories added 0.56 percentage points to GDP growth in the third quarter of 2008.

Significant increases in government spending and net exports offset most of the fall in other components of GDP. International trade was a substantial contributor to GDP growth in the third quarter. An increase in exports contributed 0.78 percentage points to GDP growth, while a decrease in imports contributed another 0.35 percentage points.  The chart shows the contribution of net exports (exports minus imports), which added 1.13 percentage points to GDP growth. However, with a strengthening dollar and slowing economic growth around the world, net exports are likely to grow more slowly in the future. 

An increase in government spending contributed 1.15 percentage points to GDP growth. Of these, federal government spending contributed 0.97 percentage points, while state and local government spending contributed 0.18. Within the federal government expenditures, spending on national defense increased substantially faster than non-defense spending. The government may still decide to further increase its spending, but even if it does, it looks increasingly unlikely that government spending alone can keep GDP growth from negative territory

The advance estimates of GDP growth reported here are based on data that is incomplete and therefore the estimates are subject to potentially substantial revisions once more comprehensive data become available.  More accurate preliminary estimates will be released November 25. The Bureau of Economic Analysis reports that the standard deviation of revisions from advance to preliminary estimates is 0.4 percentage points. From advance to final estimates, deviation is 1 percentage point. This means that the revised value of the third-quarter GDP growth may yet end up being positive, or it also may end up significantly more negative.

Bookmark this article: