Armed with more complete economic data, the Commerce Department revisited its estimate for third-quarter Gross Domestic Product (GDP)—and the results didn’t disappoint. In a nutshell, the U.S. economy grew at a 3.1% annual pace, over double the 1.3% pace in the second quarter. This is also a significant improvement over the Commerce Department’s earlier estimate of 2.7% growth.
What changed since the last estimate? Well, it’s simple—the U.S. consumer had an even bigger impact on the economy than expected. In the third quarter, Americans ramped up their purchases of goods and services by 2.6%—nearly triple last quarter’s pace.
Interestingly enough, defense spending rose 12.9% in the third quarter. And for the first time in three years, state and local governments increased spending. So for the first time in quite a while, the public sector wasn’t a drag on the economy. This is fortune because thanks to fiscal cliff uncertainties, businesses built up their stockpiles and cut spending.
Looking ahead, I believe that things will return to normal once the fiscal cliff issue has been resolved—businesses will become more willing to invest while the government cuts to come will put a damper on growth. The trillion dollar question is what will U.S. consumers do once the holidays are over. Although consumer spending this holiday season is expected to be the strongest in several years, in the first quarter consumers are likely to have their traditional spending hangover when their credit cards bill come due.
As always, I’ll keep my eyes peeled for any changes in consumer spending, but at least today’s results have kept the market afloat even with the drama coming out of the Beltway.