GDP: positive expectations for growth

October 26, 2011

The third quarter was a rough one. Between July and September, the United States’ credit rating was downgraded, Europe teetered on the brink of catastrophe and the financial markets entered a dangerously volatile phase.

Yet, it appears to have been the strongest quarter this year for U.S. economic growth, according to projections for a key indicator due out Thursday morning.

Forecasters expect that when the Commerce Department releases its first estimate of the number, gross domestic product will have risen at a 2.5 percent annual rate in the third quarter. That would be the highest growth rate in a year and would trump the 0.7 percent average pace over the first half of this year.

There is reason to think that the earlier rate overstated the weakness of the U.S. economy and that a higher third-quarter number could be a rebound effect. Auto production ramped up in the third quarter, for example, as the supply chains that were disrupted by the Japanese earthquake in the spring reopened. And trade data got a boost from the lower price of imported oil.

Still, the 2.5 percent expectation reflects an economy that, for all its challenges, doesn’t appear to be falling off a cliff. Although it shows the diminished economic expectations of the post-crisis age, it implies that the economy is growing only about as fast as it is capable of in the longer term. But it’s not fast enough to claw out of the deep hole of 9 percent unemployment. In other words, even the best quarter for gains in a year — and one that benefited from some one-time factors — isn’t strong enough to bring down unemployment meaningfully, even if it were sustained.

GDP is the broadest measure of economic activity, but it is also inherently backward-looking. There’s a lag of nearly a month between the end of the quarter and the initial release of data, which in turn is revised twice. So, to get a sense of what the economy will look like going forward, it’s worth focusing on the details of Thursday’s report.

It would be a good sign if growth was driven by consumer spending, exports and business investment in equipment and software. All would imply underlying momentum in key longer-term drivers of economic gain.

But if the growth in GDP was driven by rising inventories or declining imports, the outlook would weaken. Falling imports could reflect a mix of lower energy prices and more cautious U.S. consumers. Higher business inventory could mean that production will slow.

The good news is that forecasters are projecting that those details will turn out to bode well for the future. The consensus is that personal consumption expenditures, the largest single component of GDP, rose at a 1.9 percent annual rate in the third quarter.

One leading forecasting firm, Macroeconomic Advisers, pro­jects that exports rose at a 6.1 percent annual rate, with a 1.3 percent rise in imports. Business spending on equipment and software is forecast to have risen at a 16.9 percent rate.

The pullback in government spending, however, is predicted to have been a drag on growth. Macroeconomic projects that government spending fell at a 0.8 percent annual rate.

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