Press Releases

Statement by Assistant Secretary for Economic Policy Karen Dynan for the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association

(Archived Content)

The Commerce Department reported last week that real GDP increased at an annual rate of 1.5 percent in the third quarter.  The gain was considerably smaller than the 3.9 percent increase posted in the second quarter largely due to a marked pullback in the volatile inventory category.  Smoothing through the quarter-to-quarter fluctuations, real GDP has risen 2 percent over the past year.  Domestic demand has been strong over this period, with real final sales to private domestic purchasers rising at a robust 3¼ percent pace.  However, our economy has faced headwinds from slower foreign growth, which has been weighing on demand for our exports.

Consumer spending has shown particularly noteworthy gains.  In the third quarter, real personal consumption expenditures increased at an annual rate of 3.2 percent following a 3.6 percent gain in the second quarter.  The recent strong performance reflects favorable fundamentals.  Improving labor market conditions have boosted income.  Consumer confidence remains near its highest level since the mid-2000s.  Household balance sheets are in good condition because increases in home and equity prices have raised household wealth and because deleveraging and low interest rates have sharply reduced debt burdens.  In addition, savings from low energy prices has freed up income for spending on non-energy goods and services.  These factors should support further robust consumption growth in in the months ahead.
Real business fixed investment moderated in the third quarter, rising 2.1 percent after a 4.1 percent gain in the second quarter.  Structures investment declined in the third quarter and has been generally weak this year because of reduced investment in the oil and gas sector.  Firms also took a bit of a breather from spending on intellectual property products in the third quarter after very large gains earlier this year.  In contrast, real equipment investment strengthened notably in the third quarter, advancing 5.3 percent after a modest 0.3 percent rise in the previous quarter. 
Businesses accumulated inventories at a sharply slower pace in the third quarter, with the change in private inventories subtracting 1.4 percentage points from real GDP growth.  The slowdown was expected as inventories had jumped sharply in the first quarter and then remained at an elevated level in the second quarter. 
Housing activity has continued to strengthen this year.  Real residential investment rose 6.1 percent in the third quarter and has increased at an average annual rate of 8.5 percent so far this year, stepping up from gains of 5.1 percent and 3.5 percent during 2014 and 2013, respectively.  The pickup in housing investment this year has coincided with a pronounced strengthening in the pace of household formation.  Over the year ending in the third quarter, Americans formed nearly 1½ million new households, well above the historical average and roughly double the pace recorded earlier in the recovery.  This step-up bodes well for residential investment going forward.
Net exports were essentially neutral for GDP growth in the third quarter, as a slight increase in exports was offset by an uptick in imports.  However, net exports have been a drag on growth for much of the past year.  Export growth has slowed steadily over the past four quarters, reflecting lackluster growth among our major trading partners.  At the same time, import growth has picked up as domestic economic conditions have strengthened.  These developments have caused our net export deficit to widen substantially, reducing GDP growth over the past year by roughly 2/3 of a percentage point. 
Labor market conditions continue to improve.  The U.S. economy added an average of 167,000 jobs per month in the third quarter, compared with an average of 231,000 jobs per month in the second quarter.  The recent moderation in the pace of job growth is consistent with an economy that is getting closer to full employment.  The unemployment rate declined 0.8 percentage point over the past year and, at 5.1 percent in September, is at its lowest level since early 2008.  Broader measures of underemployment are also approaching more normal levels.  For example, the rate of involuntary part-time employment has declined by 0.7 percentage point over the past year, although, at 3.9 percent, it is still nearly a full percentage point above its 2001-2007 average of 3.0 percent.  The employment report for October 2015 will be released at the end of this week.
The decline in energy prices since mid-2014 has had a meaningful effect on our economy, supporting the spending of consumers and energy-using businesses, reducing the profitability of our oil and gas producers, and keeping overall inflation low.  Although oil prices moved somewhat higher this past spring and early summer, they moved lower again through the end of August and, over the past two months, have fluctuated narrowly around the six-year lows reached in March.  The one-month futures price of West Texas Intermediate crude oil is currently trading around $47 per barrel, about $34 lower than a year ago.  The average retail price for regular gasoline has declined steadily since mid-August, and at $2.23 per gallon in the latest week, is about 83 cents lower than a year ago.    
During the 12 months ending in September, the consumer price index (CPI) was flat, on net, after rising 1.7 percent in the year-earlier period.  The core CPI, which excludes food and energy, rose 1.9 percent over the past year.  Core consumer inflation has been below 2 percent since mid-2012.  Core consumer services inflation has been moderate for the past three years, and core consumer goods price inflation has remained in negative territory for nearly as long.  Although labor market slack has been dissipating, growth in worker compensation remains tepid.  Over the past year, the Employment Cost Index for private-industry workers rose 1.9 percent, roughly in line with gains of recent years, but still well below the 3½ percent average annual pace recorded in the decade prior to the recession.  That said, because inflation has been very low, the modest recent gains translate into moderate inflation-adjusted increases. 
The federal budget deficit has narrowed sharply from its peak of 9.8 percent of GDP in FY 2009.  In FY 2015, the deficit narrowed by $44 billion to $439 billion.  Relative to the size of the economy, the deficit in FY 2015 was 2.5 percent of GDP, down from 2.8 percent in FY 2014 and the smallest since FY 2007 when the deficit was equivalent to 1.1 percent of GDP.  Early on, fiscal consolidation was a considerable drag on economic activity, but the public sector is no longer holding back the economy.  Government spending in the aggregate has contributed modestly to economic growth thus far in 2015 after subtracting from GDP growth in each of the past 4 years.  Secretary Lew welcomed the bipartisan budget agreement reached last week, noting that it increases access to the resources needed to make critical investments in infrastructure, schools, public health and other important priorities for our country and keeps our country safe.
While the external sector is expected to remain a drag on growth in the near future, the U.S. economy is likely to grow at a solid, above-trend pace, supported by strong private demand, low and stable inflation, further improvements in labor market conditions, and healthy levels of consumer confidence.  Indeed, a consensus of private forecasters is projecting growth of 2.7 percent in the final quarter of this year and 2.6 percent over the four quarters of 2016.