Today I want to talk about what may be the most important three-letter acronym when it comes to the U.S. economic recovery: GDP, which stands for Gross Domestic Product.
GDP is the broadest measure of a nation’s economic activity—adding up the total value of all goods and services produced in the U.S. This influential status update on the U.S. economy takes into account net exports, government spending, consumption, investment and inventory. Of course, out of these, the most important component is consumption, which accounts for about two-thirds of GDP.
The latest report is the advance estimate for third-quarter GDP—which measures the U.S. economy’s progress over the third quarter. Because this is such an important report, the Commerce Department officially revises each quarter’s GDP estimates a total of four times: three during the quarter (advance, preliminary and final), as well as a final time once a year in July when the annual benchmark revisions are announced.
And what had the newswires buzzing this morning is that the U.S. economy grew at an annual rate of 3.5% in the third quarter. While this represents a slow-down from the 4.6% growth during the second quarter, this was substantially higher than economists’ estimates of 3.0% growth.
Surprisingly, defense spending and a shrinking trade deficit were the primary drivers of growth. This is the first time in several quarters that the public sector hasn’t dragged down overall growth. The improving labor market and expanding oil supply also contributed to economic progress.
At the same time, consumer spending and business investment were sluggish during the summer months. Personal consumption, which accounts for a large chunk of the U.S. economy, increased at a 1.8% rate, below the 1.9% consensus estimate. However, economists expect falling gas prices to boost consumer spending in the fourth quarter.
The bottom line is that the economic recovery is gaining steam. With the latest results, we’ve seen a GDP growth rate of 3.5% or higher in four of the past five quarters. With the Fed still committed to its zero interest rate policy, we are truly in a "Goldilocks" economy.