Why Was Q3 GDP Growth Revised Downward To 2.2%?

As Megan just mentioned, GDP growth was revised downward, again, today by the Commerce Department. It started at 3.5% in October, only to be revised down to 2.8% in November. Now we learn that it was really just 2.2%. That means that GDP growth was originally forecast to be more than 50% higher than we now know it is, as 2.2% is final. Megan explained that most of the quarter's growth can be attributed to cash-for-clunkers. So what made for the overestimates in prior months?

I find the reasons for the latest downgrade particularly troubling. The Associated Press explains:

The main factors behind the downgrade: consumers didn't spend as much, commercial construction was weaker, business investment in equipment and software was a bit softer and companies cut back more on inventories.

Consumer spending is a huge portion of GDP -- around 70%. If that isn't recovering as quickly as economists thought, then it could pose a threat for growth in subsequent quarters. Yet, I can't say I find it surprising that consumers are still reluctant to spend in this economic environment.

Weaker commercial construction also means bad news for employment prospects. Construction was one of the worst hit industries, so a steeper recovery there would also have been a good sign for jobless Americans who work in that sector.

Finally, business investment might be the U.S.'s best chance for seeing a real recovery take hold. Consumers aren't likely to do it with their wallets at 10% unemployment, but businesses could be more comfortable spending with their expenses cut to the bone and inventories depleted. So seeing that number come in softer is particularly worrying.

Of course, the optimists out there will continue to celebrate 2.2%. After all, it's still positive, right? That's a lot better than the quarters prior. Maybe I'm just not squinting hard enough.

I have to believe 2.2% is a huge disappointment for many of those who were first so impressed with 3.5%. Given the massive stimulus spending, Washington almost certainly would have liked to have seen something closer to that original growth estimate stick. I'm eager to see how these changes affect GDP's path for the remainder of the year and into 2010. From what it sounds like, the reasons for the lower-than-forecast growth in the third quarter could make for worse projections.

Presented by

Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.

Why Is Google Making Human Skin?

Hidden away on Google’s campus, doctors at a world-class life sciences lab are trying to change the way people think about their health.

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register with Disqus.

Please note that The Atlantic's account system is separate from our commenting system. To log in or register with The Atlantic, use the Sign In button at the top of every page.

blog comments powered by Disqus

Videos

Why Is Google Making Human Skin?

Hidden away on Google’s campus, doctors are changing the way people think about health.

Video

How to Build a Tornado

A Canadian inventor believes his tornado machine could solve the world's energy crisis.

Video

A New York City Minute, Frozen in Time

This short film takes you on a whirling tour of the Big Apple

Video

What Happened to the Milky Way?

Light pollution has taken away our ability to see the stars. Can we save the night sky?

Video

The Pentagon's $1.5 Trillion Mistake

The F-35 fighter jet was supposed to do everything. Instead, it can barely do anything.

More in Business

Just In