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The US economy picked up speed in the third quarter, or so today’s initial estimate of Q3 GDP shows. The economy expanded by 2.8% in the three months through September vs. the previous quarter, based on a seasonally adjusted annualized real rate. That’s quite a bit better than the consensus forecast of 2.0% and The Capital Spectator’s 2.1% average econometric nowcast. The faster pace of growth in Q3 was driven largely by “a deceleration in imports and accelerations in private inventory investment and in state and local government spending,” according to the Bureau of Economic Analysis. But it’s unclear if this is a sign that the economic growth will continue to improve. For one thing, consumer spending remains tepid, according to today’s report. Still, it’s hard to argue that the economy is slowing via the data du jour. In a separately released report today, new filings for jobless benefits dropped again last week. Overall, today’s news reinforces the message that the economy continues to grow at a moderate pace with minimal signs of distress on the immediate horizon.

It’s encouraging to see positive comparisons in all the major components in today’s GDP report. But it’s also worth noting that personal consumption expenditures rose a tepid 1.5% in Q3 — the slowest pace in more than two years. Most of the slowdown in consumer spending was due to a sharp drop in services-related spending, which slowed to a crawl with a scant uptick of 0.1%, which is the smallest quarterly gain since the Great Recession ended in Q2 2009. The good news is that some of the slower spending on services was offset by higher consumption in goods. The quarterly comparison shows that spending on goods advanced 4.3% in Q3, the best gain since 2012’s first quarter. Another bright spot: investment overall gained 9.5% in Q3, up a bit from 9.2% in the previous quarter and the highest rate since the first three months of 2012.

Today’s jobless claims report juices the case for optimism a bit more by advising us that layoffs continue to drop. For the fourth straight week, the number of new filings for unemployment benefits retreated on a seasonally adjusted basis, a decline that suggests that the recent surge in claims numbers really was a temporary affair due to reporting glitches in several states. Indeed, the annual rate of decline for claims dipped a bit deeper into the red with last week’s tally falling more than 7% vs. the year-earlier level. That’s the biggest drop since late September and it implies that the healing trend in the labor market, sluggish as it appears to be, will roll on for the foreseeable future.


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By some accounts, today’s upbeat GDP report, despite its warts, is a new clue that the economy will post even stronger growth in the months ahead. “This will certainly fuel expectations that the underlying economy is stronger than the mixed data have suggested,” one analyst tells Bloomberg. “The question is whether or not the markets can accept good news as good news or whether we’re still on the trajectory where good news is bad news,” advises Quincy Krosby, a market strategist at Prudential Financial. “We’re going to reach an inflection point in the market where good news is in fact good news.”

Then again, let’s wait another day and see what tomorrow’s payrolls report for October brings. For the moment, it’s best to manage expectations down on this front. The consensus forecast sees a weak rise of just 110,000 for private payrolls, a projection that's near the lowest gain since mid-2012.

Source: Q3 GDP Delivers An Upside Surprise