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The GDP Numbers That Stole Christmas

The US Bureau of Economic Analysis has announced that in Q3 the US GDP grew by an annualized 4.3% or 1.1% over the last quarter. That is significantly higher than expected. Maybe the US economy is doing alright. Well, that is until you dig a little deeper into the number.

The BEA breaks down the GDP growth into consumer spending, government spending, investment, imports, and exports.

And you can clearly see that consumer spending went up the most, accounting for about half of GDP growth. So then the question is: what did they buy?

Well, they actually discuss this:

The increase in consumer spending reflected increases in both services and goods. Within services, the leading contributors were health care and other services. Within goods, the leading contributors were recreational goods and vehicles as well as other nondurable goods.

It goes on to say that other services are mostly international travel and legal services, and nondurable goods are mostly prescription drugs. So we have health care, international travel, legal services, recreational goods, vehicles, and prescription drugs.

Quite a weird list, it supports something called the ‘K-shaped economy’. This is the idea that the rich are getting richer and the poor are getting poorer. Now I don’t think it’s anything new but we can see a clear divide in these figures: the rich are buying travel and vehicles while the poor are spending more on healthcare and drugs.

Healthcare is an interesting one because the One Big Beautiful Bill Act (OBBBA) had quite a few points on healthcare. The ending of subsidies, the big one, doesn’t go into effect until 2026, but a few other things did happen already. Most notably more enforcement and increased paperwork.

I guess this has already caused healthcare spending to increase. And if these relatively minor changes have already increased healthcare spending, I shudder to think what will happen next year when the OBBBA starts kicking people off Medicaid and ending ACA subsidies.

And then there are non-durable goods. Well, goods in general. Because if spending on goods went up you’d expect to see an increase in imports or investment. So what gives?

Well, there is a technical notes section that goes into a bit more detail and it is interesting. First they say:

The decrease in investment primarily reflected a decrease in private inventory investment

Meaning stockpiles are being diminished. So in Q1 of this year imports surged as companies tried to import things before the tariffs took effect.

This is why the Q2 numbers were so good: fewer imports. I thought it ended in Q2 though. Surely companies can’t stockpile over a quarter’s worth of goods. Well, I guess they can.

So one has to wonder: will we also see this in Q4 as well? It’s unlikely. In Q2 we saw a massive jump in GDP due to decreased imports. This contributed almost 5% to GDP while investment was down over 2%.

In Q3 imports made up less than 1% of GDP growth and investment was flat. So it’s clear what’s happening here: stockpiles are running low and companies are quickly trying to shift production to the US. Can they? Unlikely. It takes years to build a factory. And by the time you finally finish it, the next administration could roll back the tariffs or the courts could find the tariffs illegal.

So I guess they’re expanding existing operations and maybe someone is going to build a new factory, but it does not look like this change is that significant as investment is still flat. I guess it’s easier to just pay the tariffs than try to shift production.

And this is, of course, contributing to inflation. The US inflation rate in November was 2.7% and people were quite surprised that it was this low. Many were forecasting it would be as high as 3.1%. But 2.7% is only the consumer inflation rate and this number hides a more worrying figure:

The price index for gross domestic purchases increased 3.4 percent in the third quarter, compared with an increase of 2.0 percent in the second quarter.

The gross domestic purchases price index is what inflation is for the entire economy. The grey line, the personal consumption expenditures price index, is the inflation that consumers pay. So the economy is paying on average 3.4% more but consumers are paying over 2.8% more. This is clear evidence of what many have been saying: companies are absorbing some of the tariffs for now.

Will they continue to absorb tariffs in the future? Unlikely. Well, I’m sure some companies can absorb the tariffs, but most companies cannot do this and still make enough money to operate. In fact bankruptcies are going up with tariffs cited as a reason.

So if you just read the headline figure of 4.3% you’d think the US economy is in great shape. But if you dig a little deeper you start to see that a lot of this growth is not sustainable.

You know, I’ve never liked GDP much as a metric. It seems to confuse two things: how much money flows in an economy and how much it actually produces. Neither of which is a great indicator of the overall health of an economy.

Usually it’s an OK indicator. Except if someone tries to artificially jack it up by cutting imports or increasing spending by cutting healthcare programs, both of which appear to have happened. In the short term these will increase GDP. In the long term? ¯_(ツ)_/¯