October 30, 2008 (GDP Byte)

Sharpest Consumption Drop Since 1980 Pushes GDP Negative

By Dean Baker

For Immediate Release: October 30, 2008
Contact: Alan Barber, (202) 293-5380 x115

“A surge in defense spending added 0.86 percentage points to GDP growth.”

Consumption spending fell at a 3.1 percent annual rate in the third quarter, which was the main factor leading to a 0.3 percent decline in GDP. Inventory build-ups prevented an even larger decline; final demand fell at a 0.8 percent annual rate.

The fall in consumption spending was the largest drop since an 8.6 percent decline in the second quarter of 1980. It was driven primarily by a drop of 14.1 percent in durable good purchases. Car sales fell at 25.6 percent annual rate in the quarter. Purchases of non-durable goods also fell sharply, declining at a 6.4 percent rate. Spending on services continued to increase, rising by 0.6 percent. Health care spending was the main factor behind this growth.

Residential construction fell for the 11th straight quarter, falling at a 19.1 percent annual rate. This reduced GDP growth for the quarter by 0.72 percentage points. Residential construction is now equal to just 3.3 percent of GDP. It peaked at 6.3 percent of GDP in the 4th quarter of 2005.