GDP Increases 2.5%

Note -- I'm traveling with an old computer, so the daily charts won't be up until I return home next Monday.

From the BEA:

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.5 percent in the third quarter of 2010, (that is, from the second quarter to the third quarter), according to the "second" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 1.7 percent.

The GDP estimates released today are based on more complete source data than were available for the advance estimate issued last month. In the advance estimate, the increase in real GDP was 2.0 percent (see "Revisions" on page 3).

The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, nonresidential fixed investment, exports, and federal government spending that were partly offset by a negative contribution from residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.

The acceleration in real GDP in the third quarter primarily reflected a sharp deceleration in imports and accelerations in private inventory investment and in PCE that were partly offset by a downturn in residential fixed investment and decelerations in nonresidential fixed investment and in exports.

First, note there is a breadth of help for GDP: people are spending money, exports are increasing and the inventory investment cycle continues. This is a good smattering of the various economic sectors that can contribute to growth, indicating we're not as bad off as some pundits claim. Additionally, the negative whack from imports decreased.

PCEs accounting for 1.97 of the 2.5% increase, which places them on pace with their traditional role as the 70% driver of the economy. Overall fixed investment added 1.51, with non-residential adding .96 while residential subtracted .75. Expect some harping on the 1.31 contribution from inventory stocking (which for some unexplained reason has become an invalid economic activity). However, I personally don't think this is bad at all. Net exports took 1.76 off growth, indicating the trade balance is once again an issue going forward for the economy.

I'm particularly impressed with the continued improvement in PCEs, which were up 2.8% from the preceding quarter. Service expenditures were up 2.5% and durable goods purchases were up 7.4%. Consumer are still spending money, although at a slower pace than in previous expansions when PCE month to month growth was usually above 3%. Gross investment increased 12.4%, which is a decrease from the 26.2% pace of the previous quarter. This deceleration is to be expected, as the previous pace of expansion was unsustainable. Imports increased 16.8% and exports increased 6.3%. While the pace of import increases decreased, they are still increasing at a far faster pace than exports -- a trend which needs to change.

Overall, this is an encouraging report going forward. While it's not a barn burner, the upward revision is a good and welcome development.

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