The U.S. economy grew 2.7% last quarter. That’s not entirely good news.

The economy grew at a 2.7 percent pace in the third quarter of 2012, not the 2 percent pace previously estimated. That's the latest verdict from the Bureau of Economic Analysis today, which went back and updated its GDP numbers as better data rolled in.

Bulldozing our way to recovery. (AP)

On the surface, this looks like a good sign—the economy was growing even faster than we thought. The revision also makes President Obama's reelection seem a bit less mysterious, seeing as how the economy was actually trundling along at a healthy clip in the months leading up to November.

But the details of the report aren't entirely positive. About 0.7 percentage points of growth between July and September came from an anomalous spike in federal defense outlays. We've already dissected that strange surge in military spending — experts say it most likely came from the Pentagon looking to spend through its existing budget authority before the end of the fiscal year (and before the sequester spending cuts clamped down). 

What's more, another 0.8 percentage points of growth came from faster-than-expected inventory accumulation. Businesses were restocking at a faster rate, but sales weren't necessarily keeping up. Final sales growth actually got revised downward from 2.1 percent to 1.9 percent. Many analysts think it's unlikely that companies will keep stockpiling inventory next quarter — if anything, they're likely to cut back a bit as sales slow.

So growth last quarter was boosted by two short-term factors. And the problem here, as Nigel Gault of IHS Global Insight points out, is that the rest of the economy — apart from housing — is still relatively fragile. "Consumer spending growth was sluggish at 1.4 percent, business fixed investment declined, and even though exports did better then first thought they were only up 1.1 percent," Gault notes. "The one shining star was residential fixed investment, up 14.2 percent as the housing recovery kicked into gear."

That's not to say the U.S. economy is headed for a recession or anything. Gault expects that the slowly recovering housing market and improved business confidence should help bolster economic activity in 2013 — assuming that Congress figures out how to resolve the fiscal cliff. "But the immediate growth outlook is soft," he notes. 

Here's a look at U.S. quarterly economic growth since 2008:

Meanwhile, nominal GDP—basically GDP that hasn't been adjusted for inflation—grew at a 5.5 percent pace in the third quarter of 2012. Some economists, such as Columbia University's Michael Woodford and Christina Romer think that the U.S. should aim for consistent nominal GDP growth of around 4.5 to 5 percent. So, at first glance, the economy appears to be on pace.

But there's a catch: Right now, thanks to the recession, the U.S. is so far below that nominal growth target that the economy needs even faster growth to catch back up. Nominal growth of 5.5 percent helps a bit, but the gap is still large:


That helps explain why Federal Reserve officials are calling the current pace of growth "disappointing," as Federal Reserve Bank of New York President William Dudley put it on Thursday. He added that the Fed is planning to "stay the course" on its stimulus efforts.

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Ezra Klein · November 29, 2012

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