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.