U.S. Grows at 2.5% Pace in Q3: Is the Recovery Back On Track?

The rise in GDP was the briskest in a year, but it won't be enough to create the jobs the nation needs

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Finally, the U.S. gets a solid dose of good economic news: GDP grew at an annualized rate of 2.5% in the third quarter. After growing at a rate of just 0.8% in the first half of the year, that's pretty welcome news. The quarter's growth rate was the highest in a year. This appears to show that the recovery is back on track. Unfortunately, that track was a jobless recovery.

Digging Into the Third Quarter Results

First, here's how the quarter stacks up, compared to others since the recession began, according to the Bureau of Economic Analysis:

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GDP has improved, but it isn't exactly stellar. We saw better numbers from late 2009 through the first half of 2010. Still, it's certainly a big improvement compared to earlier this year. Let's look at how the various components of economic activity contributed.

Consumer Spending

The biggest single contributor to third quarter's more rapid growth was consumer spending. It accounted for $57 billion of the quarter's $81 billion in growth, about 70%. Its improvement was broad. On the goods side of the equation, durable "recreational goods and vehicles" was a big contributor. Although auto sales didn't help, their nearly flat growth was much better than their big decline in Q2. We also saw gasoline and other energy purchases approximately flat after declining sharply in the second quarter.

But services were the bigger reason for the boost provided by consumer spending. Household spending jumped, led by health care. Almost all of the major sub-components of services spending increased in the third quarter.

Private Investment

Businesses also helped to increase the nation's growth. Equipment investment, in particular, pushed up GDP in the third quarter. Spending on this category of good was broadly better, from industrial to transportation to other equipment. After brisk growth for the past six quarters, inventories were close to flat. That cut a chunk out of the growth provided by business.

The housing market failed to provide a meaningful boost to economic activity. The sector has barely added anything to GDP growth over the past year.

Net Exports

Like in Q2, the U.S. economy saw a modest benefit from the shrinking trade gap. Although the U.S. continues to run a trade deficit, it tightened by $7 billion. This helped add about a quarter of a percentage point to Q3's growth.


The government neither helped nor hampered growth last quarter. Its spending was precisely unchanged compared to the second quarter. Although the federal government spent a little bit more in the third quarter, its increase was neutralized by a decline in spending by state and local governments.

Is the Recovery Back?

Today's report probably comes as a relief to many: a double dip no longer appears to be imminent. But that doesn't mean the U.S. recovery is suddenly strong and enduring. At this point, it's neither.

While 2.5% growth is better than a weaker result, it isn't enough to count on a much brisker rate of hiring. After the U.S. grew at the same pace in the third quarter of 2010, jobs were added at the pace of just 139,000 per month in the fourth quarter. That isn't enough to make a significant dent in the unemployment rate. As a means of comparison, when unemployment dropped from 9.2% to 8.3% in the fourth quarter of 1983, GDP growth was 8.1% in the third quarter.

Other obstacles also remain firmly in place for the U.S. economy. Consumer confidence continues to struggle. In the third quarter, Americans' spending was responsible for most of the growth we saw. If it suddenly slows due to gloomy consumers, then GDP growth will fade as well. Although we're seeing some progress in Europe, its problems are not yet entirely solved. Of course, it's also important to remember that this is just the first estimate of third quarter growth. We'll get two more revisions over the next two months.

We should be cautiously optimistic about today's growth estimate. The proper response is an it-could-have-been-worse attitude about the quarter's measure of economic activity. While it appears to show that the U.S. isn't headed into another recession, it doesn't indicate that the nation's troubles are entirely behind it.

Image Credit: REUTERS/Robert Galbraith