GDP Outpaced Expectations in Third Quarter

The economy grew by 2 percent in the third quarter, fueled by more consumer spending and a housing rebound

In this Wednesday, May 30, 2012, photo, shoppers walk through the South Shore Mall in Braintree, Mass. U.S. retail sales declined in April and May, pulled down by a sharp drop in gas prices. But even after excluding volatile gas sales, consumers increased their spending only modestly.
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President Obama got another happy pre-election surprise today, with a third-quarter GDP estimate coming in above expectations. The Commerce Department reported today that real GDP grew at an annual rate of 2.0 percent during the third quarter. That beats consensus expectations of around 1.8 percent and is an acceleration from the second quarter's 1.3 percent.

Consumer spending and federal government spending are two factors that boosted GDP last quarter, as well as an acceleration in spending on residential housing and home improvements. However, a poor showing in nonresidential fixed investment — business purchases of buildings and equipment — and exports both detracted from slowing GDP growth.

"I wouldn't be breaking out the confetti, but it's about two-tenths of a percent better than expected," says Liz Ann Sonders, Schwab chief investment strategist. She says that the report's positive news about housing is particularly encouraging.

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"That continues to be the huge bright spot in the economy right now," says Sonders. Rising housing prices and low mortgage rates are helping people to think of housing as a good investment and inspiring them to buy, she says. This week, Zillow reported that U.S. home values grew by 1.3 percent in the third quarter, their biggest gain since 2006. Spending on housing has effects well beyond the housing market, says Sonders.

"That has ripple effects into confidence, spending, and eventually jobs," she says.

While there are plenty of positives in today's report, there is still plenty of reason to be worried for the future. Consumer spending grew last quarter, but as Sonders points out, it was only just in line with GDP, growing by 2.0 percent.

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Furthermore, the fiscal cliff continues to threaten growth. The CBO earlier this year predicted that the spending cuts and expiring tax cuts scheduled for the end of the year could send the economy into a recession next year. Part of the worry is that the outcome is so completely up in the air, says one analyst.

"It's in the hands of politicians, and who knows? They showed themselves to be pretty dysfunctional last August," when the debt ceiling fight spurred the U.S.'s first ever downgrade to its credit rating, says Martin Leclerc, managing partner at Barrack Yard Advisors.

Any fix to the fiscal cliff, however, is going to be a drag on the economy, points out Sonders, as it will likely contain some combination of government spending cuts and increased revenues. However, the positive effects of a fix — namely, certainty at long last — could mitigate some of the negative effects, she adds.

"You've got the sort of mathematical hit that that still brings," she says, "but you have to wonder if you get enough of an offset by the confidence boost, particularly from businesses."

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Danielle Kurtzleben is a business and economics reporter for U.S. News & World Report. Connect with her on Twitter @titonka or via E-mail at dkurtzleben@usnews.com.