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 second 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 2.9% in the third quarter. This was well above economists’ consensus estimate of 2.5%, and it represents a significant improvement over the 1.4% pace logged in the second quarter.
Unfortunately, the details of this report were a little murkier. The third-quarter results were inflated by a 10% surge in exports, which in turn was caused by a record soybean crop. This added 0.83% to Q3 GDP. A build-up in inventories, which was caused by a jump in durable goods orders, added another 0.61% to Q3 GDP.
At the same time, consumer spending remained tepid. Personal expenditures rose just 2.1% last quarter, compared a more robust 4.3% pace in Q2. This is alarming, because consumer spending accounts for nearly two-thirds of overall economic growth. So, while the headline GDP results were good, the fact that much of it was driven by extraordinary factors isn’t as encouraging.
Even so, news like this could tip the balance towards an interest rate hike in December. As a result, I’m going to be watching next Friday’s payroll report very carefully. I’ll post an update on the blog at that time; in the meantime, have a wonderful weekend.