The 3.5 percent GDP growth number reported for the third quarter was widely touted in the media. Some perspective would have been helpful. In the four quarters following the end of the 74-75 recession growth averaged 6.2 percent. In the four quarters following the 1981-82 recession the economy grew at a 7.5 percent annual rate. In short, given the severity of the downturn, the growth reported in the third quarter was quite weak. Most forecasts show growth being even weaker in future quarters. There were a couple of other items that also were not reported accurately. Contrary to what the Washington Post told readers, businesses are not rebuilding their inventories. Inventories shrank at a $130.8 billion (in 2005 dollars) annual rate in the quarter. Inventories contributed to growth in the quarter because the rate of decline was slower than in the second quarter. Also, the widely repeated claim that businesses increased spending on equipment and software is not entirely accurate. The Commerce Department reported that businesses bought equipment and software at a $895.3 billion annual rate in the quarter, that is down from the $897 billion annual rate in the second quarter. However, adjusting for inflation, it reported that spending measured in 2005 dollars increased from $876.5 billion to $879 billion. This is primarily a story of measured quality improvement in computers and software. This point matters because the additional spending by this measure does not mean that more people are being employed producing equipment and software. If the quality adjustment is accurate, it means that businesses are getting better equipment and software, which will allow them to be more productive in the future, but this does not help employment today.
--Dean Baker
