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With the ongoing saga in Europe taking center stage at the moment, the investment community did receive some decent news on the U.S. economy this morning. At 8:30 A.M. EDT, the Commerce Department reported that third-quarter GDP advanced at a 2.5% clip, up from 1.3% in the April-June period and the biggest gain in more than a year. The figure, though, was still a bit shy of the 2.7% economists were expecting.

All in all, it was an encouraging report. The increase reflected positive contributions from several sectors of the economy, including personal consumption expenditures (up 2.4%), business investment (+16.3%), and federal government spending (+2.0%). These gains were partially offset by negative contributions from private inventory investment and state and local government spending. Moreover, real exports of goods and services increased 4.0%, while imports expanded by 1.9%.

During the three-month period, consumers and businesses spent more, despite concerns about the economic landscape—such worries have been elevated by the recent string of mixed, and maybe more precisely quantified, unexciting reports on the domestic economy. Consumer spending last quarter was the strongest since the fourth quarter of 2010, while business investment spending was the fastest in more than 12 months. In fact, consumer spending, which accounts for nearly 70% of U.S. economic activity, grew 2.4% last quarter, a notable pick up from the 0.7% pace of the second quarter. 

That said, we do caution that GDP growth, notwithstanding the latest solid report, is still rather fragile, and is why we are looking for the pace of growth to slow in the final three months of this year. Earlier this week, the U.S. government reported that consumer confidence had fallen to a level last seen during the worst of the last recession. Too, the recent acceleration in inflationary pressures—crude oil and food prices have moved higher, with the former topping the $90-a-barrel mark—could reduce consumers’ purchasing power during the upcoming holiday shopping season. The latest report showed a moderation in inflationary pressures—the core personal consumption price index, which excludes the volatile energy and food components, rose at a 2.1% rate in the September quarter, versus a 2.3% clip in the prior three months. However, we are not overly optimistic that this trend will continue in the October-December period. A reversal in those figures could hurt consumption during the next three months.

In conclusion, the latest report on the economy was encouraging and likely further reduces the odds that another recession is possible. Still, we are not of the belief right now that the latest pace will be sustained. Continued troubles in the housing market and a weak employment picture are not an ideal backdrop for noteworthy economic expansion.  

 

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.