Unpacking a Datapalooza

A whole slew of new economic data came out today. This is the biggest data dump we’re going to get between now and Election Day, and it includes GDP, consumer spending, and inflation. Let’s call it a Datapalooza.

There’s a lot to unpack here, and it’s dense, so let’s get into it together.

First: the headline numbers. GDP grew at an annualized rate of 3.4% over the past quarter. That’s exciting news, and it’s better than expected. Forecasters thought it was going to be closer to 3%, and it’s a big step up from 2.2%, which is what we saw in the spring.

That 3.4% is measuring the rate of growth in what’s called “real GDP.” That’s the sum of everything we in the American economy produced, adjusted for inflation. It’s also the sum of all the income we earned in the whole country.

This doesn’t mean that everything in the country grew 3.4% in the third quarter. Actually, the economy grew about 0.8% in that period. 3.4% is the rate of growth. Imagine the economy is a car. You might be on the freeway driving 60 miles per hour, but if you only do that for 15 minutes, you don’t go 60 miles. Your speed probably changes after a while, because you might hit traffic. The rate of GDP growth is like that. It changes over time.

Over the past year, the economy grew about 2.1%. That’s not great and it’s not terrible. The technical term might be “meh.” And GDP growth over the past couple years has been in that “meh” area. So this 3.4% measurement is exciting, but if you zoom out, you see it’s a break from a multi-year downward trend. One good quarter doesn’t reverse that trend.

Separating signal from noise

GDP is a tricky thing to measure. Every dollar goes into it the same, but some parts of the report come out mostly signal. Others are what, in technical terms, I’d call “uppy-downy.” They bounce around a lot but don’t tell you much.

So economists look at something called real final sales to private domestic purchasers. I know — what an amazing name. Anything with that many modifiers makes economics sound complicated, which means I get a pay rise. Real final sales to private domestic purchasers is a measurement that strips out trade, inventories, and government spending. What’s left is consumer spending plus business investment; let’s call it core GDP.

Core GDP grew at a 5% annualized rate this quarter, and it was strong the quarter before, too. So the underlying economy may be a bit sturdier than the headline number suggests.

AI is all over this report

Here’s where the numbers become revealing. Investment accounted for 3.3 points of the 3.4% growth. That’s nearly all of it.

About half of that was inventories, meaning stuff firms ordered but didn’t sell. That stuff sits in the stockroom, and for technical reasons, statisticians count that as investment. For us it’s mostly noise.

Most of the rest of this was business investment in things like factories and equipment. Roughly half of that, just shy of a full percentage point of GDP growth, was what the nerds call “information processing equipment.” Everyone else calls that the AI buildout.

That’s real growth, but I (and many others) worry about how long it will last. Plus, what’s the net impact on jobs? I also worry we could create a bigger economy overall without adding more jobs.

Inflation is still hot

The Fed’s preferred gauge of inflation is called the PCE deflator (another amazing name). Headline inflation is 3.6% over the past year, and core inflation, which strips out food and energy, is 3.1%. The Fed’s target is 2%.

In September alone, headline prices rose 0.5%. That’s energy: gas, diesel, and airfares. Core prices rose 0.32% in a single month.

There’s a strange twist to all this. Core CPI, the inflation measure you usually hear about, is running at 2.6%. That almost looks healthy. Normally the Fed’s measure is below CPI. Right now it’s well above it.

The midterm grab bag

These numbers are coming out days before the midterm elections, which gives both sides a grab bag of data to pull from. Consumer spending kept pace with the economy, and that’s partially because we’re spending so much on gas. A lot of spending went to imports and that doesn’t add to GDP. Exports fell sharply. Government spending contributed, mostly through a statistical quirk. Whoever you are, you can find something in here to make a point for your team.

The quarter was good. The trend is meh. The growth leans heavily on AI, and inflation is too hot. All those things are true at once.

There will be a lot of political spin in the next few days, and I’ve tried to give you enough here that you can check their work against.

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