You may have seen noticed Q3 GDP was revised downward to 2.2%. This is the third and final revision. Originally Q3 GDP was 3.5%. Here is the full BEA release.

A reminder, GDP is:

where

Y=GDP, C=Consumption, I=Investment, G=Government Spending, (X-M)=Net Exports.

What happened?

Here is the original breakdown of GDP components first reported:

• Price index - +1.6%
• Consumption - +3.4%
• Non-Res. investment - -2.5%
• Residential Fixed Investment + 23.4%
• Exports - + 14.7%
• Imports - +16.4%
• Gov. spending - +2.3%
• Private Inventories - + 0.94%

In the breakdown of Consumption originally we had:

• Durable Goods - +22.3% (cash for clunkers)
• Nondurable goods - +2.0%

Now with this revised 2.2% Q3 GDP, the above list breaks down:

• Price index - +1.3%
• Consumption - +2.8%
• Durable Goods - +20.4% (cash for clunkers)
• Nondurable goods - +1.5%
• Non-Res. investment - -5.9%
• Residential Fixed Investment +18.9%
• Exports - + 17.8%
• Imports - +21.3%
• Gov. spending - +2.6%
• Private Inventories - +0.69%

So, durable goods (part of C, consumption) didn't pay out as original estimated, the huge news is consumption is revised downward to 2.8% from 3.4% and non-residential investment dropped in the revision, more than double, from -2.5% to -5.9%.

That's not good to see a this much of a lack of investment in the United States.

Also notice that our trade deficit increased in the first revision, from -1.7% to -3.5%, that's more than twice the size from revisions in Q3 2009 GDP.

Durable goods, contributed 1.36% of the total 2.2% GDP with motor vehicle output being 1.45% (cash for clunkers) for Q3 2009 Total consumption was 1.96% of the total GDP growth.

That's pretty astounding to see the majority of GDP due to a $4000 dollar tax credit. Almost sad in a way, for one would hope to see massive exports of advanced new innovative goods as a reason for GDP growth.

To match our equation:

Hopefully, if you are not familiar with the actual GDP equation you can now see why so many economists are warning and worried about the U.S. trade deficit. In Q3 2009 it subtracted off 0.81% of total GDP and this is small in comparison to GDP from before this recession and a collapse of global trade.

Amazingly off isn't it? So, the lesson here is do not believe the initial GDP reports, for it will be significantly revised, Q1 GDP for example was revised from -6.1% to -6.4% and Q2 2009 GDP was revised to -0.7% from an initial -1%.

The Q3 2009 revision by far is the largest spread. -1.3% revision is an amazingly 37% off from the advanced Q3 GDP report.

Also note personal income dropped -1.4% in Q3 2009.

The United States needs about 3% quarterly GDP growth to create jobs. So the good news is this revised estimate explains a little better why we have a 10% unemployment rate, it's more in alignment with the job creation rough ratio relationship to GDP.

We've covered quite a number of EIs to date, so a review of Q4 2009 estimates and crystal ball forecasts will be covered in a later post.

Maybe we should have a place yer bets site for Q4 2009 GDP prediction. Maybe that would help the real economy.