US Economy Grew 2.5% In Third Quarter

The economy continues to struggle and recession risk is elevated, but today’s official estimate of third-quarter GDP shows that the economy didn’t surrender to contraction in the last three months. That may change, but for now the recession talk is on the defensive.

The economy grew at an annualized real rate of 2.5% in the third quarter, nearly twice as fast as the second quarter’s sluggish 1.3% pace. Today’s initial estimate of Q3 GDP from the Bureau of Economic is only the first stab at the numbers and so there’s revision risk to consider. Based on the number du jour, however, it seems as though the business cycle will live to fight another day for the forces of growth.

Digging into the details shows that several critical areas of the economy revived. Notably, personal consumption expenditures rose 2.4% in Q3, considerably better than Q2’s stall speed pace of 0.7%. A recovery in spending in durable goods over the last three months helped. A bigger rise in services spending was a plus too. Meanwhile, the government continues to be a net drag on GDP figures. This is good or bad news, depending on your policy view of fiscal austerity. In any case, nondefense Federal and state/local government columns are pinching GDP these days.
“This validates the economy is still growing, but probably not thriving, that’s the bottom line,” advises Todd Salamone, director of research at Schaeffer’s Investment Research.
“Clearly today’s GDP report is indicative of an economy that is extricating itself from a temporary soft patch, and not one that is rolling into another recession,” according to Phil Orlando, chief equity strategist with Federated Investors.
Is all well with the business cycle? Hardly. But beggars can’t be choosy these days. “It ain’t brilliant, but at least it’s heading in the right direction,” says Ian Shepherdson of High Frequency Economics. “I want to see 4 percent, but given that people were talking about a new recession, I’ll take 2.5 or 3, thanks very much.”
Of course, GDP is a lagging indicator and so it tells us what happened. The value here is limited for looking ahead. But this much is clear: Q3 wasn’t the start of new recession. As for Q4, well, the narrative remains fluid.