By Dirk van Dijk of Zacks.com
NEW YORK (TheStreet) -- In the third quarter, the economy grew at an annual rate of 2.0%, up from 1.7% in the second quarter, but down from the 3.7% pace in the first three months of the year. The growth rate was in line with consensus expectations, and frankly a bit better than I was expecting.
So how did we get to the 2.0% overall growth? What parts of the economy were growing and thus adding to growth, and which parts were acting as a drag on growth? Since the different parts of the economy are of very different sizes, and some tend to be relatively stable, while others can be very volatile, I will focus on the contributions to growth.
In other words: growth points, not the percentage growth rates. After all, a small percentage change in a very big part of the economy can have more impact than a big percentage change in a small part of the economy. I will follow the familiar Y = C + I + G + (X - M) framework, where Y = GDP, C= Consumption, I = Investment, G= Government, X = exports and M = imports.
C for ConsumptionThe biggest part of the economy by far is the Consumer or consumption, or to be more specific, Personal Consumption Expenditures (PCE). It represented 70.4% of the overall economy in the third quarter, and was the biggest growth driver. PCE contributed 1.79 growth points, up from 1.54 points in the second quarter and 1.33 points in the first quarter. The increasing contribution to growth from C is generally a good thing, at least in the short term. Over the long term, though, our economy is already weighted far too much towards C, and that contribution has been rising over the years.
Goods vs. ServicesConsumption can be broken down into two main categories: goods and services. Services is by far the biggest part of consumption at 67.15% of PCE and 47.30% of overall GDP. It was the real star of the show this quarter, chipping in 1.15 growth points -- up from just 0.75 points in the second quarter. In the first quarter, services were missing in action, adding just 0.03 growth points. This solid increase is very encouraging. Services tend to be "produced" domestically, not in China, and also tend to be more labor-intensive than goods-producing jobs. Normally demand for services is more stable than demand for goods, especially durable goods.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV