GDP increase: Up 3.5 percent in third quarter, the first rise in a year

It's good news that investors have been waiting awhile for: The U.S. economy grew for the first time in a year, rising 3.5 percent in the third quarter, the U.S. Commerce Department announced Thursday. It was the strongest growth rate in two years and was led by consumer spending, a slower reduction in inventories, a stabilizing housing market, and large increases in government spending connected to the federal stimulus package.

A Bloomberg survey had predicted a Q3 GDP increase of 3.0 percent. Prior to Q3, the economy had contracted for four consecutive quarters, including a 0.7 percent decline in Q2 and a 6.4 percent decline in Q1. The U.S government revises its GDP estimates for previous quarters as it receives more information.
Over the past 12 months, the U.S. economy contracted 2.3 percent. In 2008, the world's largest economy grew a scant 1.1 percent -- well below capacity. Meanwhile, core consumer prices -- an inflation barometer closely monitored by the U.S. Federal Reserve -- increased at a 1.4 percent annual rate in Q3.

In current dollar terms, U.S. GDP rose 4.3 percent to an annual rate of $14.3 trillion.

The Q3 data revealed a broad-based return to growth. Sales increased at a 2.5 percent annual rate, consumer spending rose 2.4 percent and durable goods spending surged 22.3 percent – the latter boosted by the federal government's "cash-for-clunkers" program. Business inventories declined 2.5 percent, but that was a marked improvement over the double-digit inventory declines posted in the first half of the year. Housing investment soared 23.4 percent, and exports surged 14.7 percent, aided by the weaker dollar. Government spending was up 2.3 percent, including a 7.9 percent increase in federal government spending.

Meanwhile, the U.S. savings rate declined to 3.3 percent in Q3 from 4.9 percent in Q2. Disposable income decreased 3.4 percent, compared to a 3.8 percent rise in Q2.

Despite the better-than-expected GDP numbers, the Q3 gains do not mean the recession is over, technically. The economy is recovering, but the National Bureau of Economic Research is the widely-accepted arbiter of economic indicators, and its defines the end of a recession as two consecutive, positive GDP quarters. And even if the next quarter's numbers prove the economy has turned the corner, one devastating effect will linger: More than 7.2 million jobs were lost amid the most severe contraction since the end of World War II.

Economic Analysis: This impressive Q3 GDP report reveals a broad-based advance in commercial activity. The economy is being propelled by residential investment, government spending, consumer spending and by the reduction in inventory declines. Further, the federal fiscal stimulus package is working. A pessimist would look at the Q3 data and question this newborn expansion's durability. An optimist would argue that government spending and the stabilization in housing and business investment have enabled the economy to start crawling out of its deep hole, and might suggest that we had avoided the abyss.

What would ensure that the economic expansion lasts? The end of monthly job losses and the resumption of job growth; but given the current slack productive capacity in the economy, job gains are probably 3 to 5 months away.
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