The optimists will have their hands full after digesting this morning’s news on the third-quarter GDP.
The economy grew by a real annualized pace of just 1.6% during the July-through-September stretch–down from 2.6% in the second quarter, and a few light years below the first quarter’s 5.6% sizzle. Third quarter growth, as a result, was the slowest in more than three years, as you can see from the chart below.
The debate on what the fourth quarter will bring officially starts now.

Meanwhile, the big surprise in today’s GDP report was the 17.4% drop in residential fixed investment (which includes spending on housing). Not only is that the biggest quarterly decline since 1991, it’s the third stumble this year on a quarterly basis. Each new number’s been negative, and each time it’s bigger than its predecessor. It’s already clear that the housing market has been correcting, and today’s GDP report only adds confirmation of the trend.
Overall, the debate about what comes next may remain as passionate as ever, but there’s no question that the economy has slowed so far in 2006. “The deceleration in real GDP growth in the third quarter,” the Bureau of Economic’s advised in a press release, “primarily reflected an acceleration in imports, a downturn in private inventory investment, a larger decrease in residential fixed investment, and decelerations in PCE for services and in state and local government spending that were partly offset by upturns in PCE for durable goods, in equipment and software, and in federal government spending.”
The good news is that the core and top-line rates of inflation, as per the personal consumption expenditures index, moderated in the third quarter. Core PCE rose at an annualized 2.3% real rate, down from 2.7% previously. Fed Chairman Bernanke’s stature and influence goes up a notch thanks to the trend. Bernanke, of course, has been promising that a slowing economy will take the edge off core inflation. We haven’t really seen that in the core consumer price index, but the idea finds aid and comfort in today’s update on third-quarter PCE.
Nonetheless, the economy has little room for further “deceleration” without triggering the “R” word. But if the odds of a recession are rising, it’s not yet a done deal, or the latest number from consumer spending implies. Joe Sixpack maintained his shopping instincts in the third quarter. Although the economy slowed during July through September, Joe’s spending pace increased. Real annualized personal consumption expenditures advanced by 3.1% in the third quarter, up from 2.6% previously, today’s GDP report revealed.
The economic outlook may be fuzzy and the data in question, but our consumer hero so far hasn’t been swayed from buying one more digital camera, SUV and plasma TV. Some things, at least, remain intact, at least for today.