GDP Growth Rate More Than Doubled in Third Quarter

Federal spending and business investment helped speed economic growth last quarter.

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Economic output was better than originally thought in the third quarter of 2012, according to the Commerce Department. Today the department revised last quarter's GDP growth estimate upward, from a 2.0 percent annual rate to a 2.7 percent annual rate. That also represents a significant acceleration from the second quarter, when GDP grew by only 1.3 percent.

Business spending on inventories and federal government spending were two of the key factors accelerating growth in the third quarter, along with spending on housing and a slowdown on imports. Residential fixed investment, which includes home construction and remodeling, grew by an encouraging 14.2 percent last quarter. Consumer spending also contributed to GDP growth, with personal consumption expenditures growing by 1.4 percent last quarter, little changed from the second quarter's 1.5 percent growth.

However, the report still contains reasons for concern. Though positive, last quarter's consumer spending figures were not particularly strong. And while businesses invested in inventories, they cut their fixed investment—including things such as building new factories — by 2.2 percent. Those trends do not bode well for strong economic growth, says one economist.

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"It is hard to have a strong economy when households are not hitting the malls hard and businesses have assumed the turtle position fearful of a crash due to the fiscal cliff," writes Joel Naroff, president and chief economist at Naroff Economic Advisors, in a commentary on this morning's GDP figures.

While the upward revision is encouraging, the news may do little to cheer markets or boost economic outlooks, as the nation remains largely concerned with more pressing issues.

"For the markets and the overall economy, I think the page has kind of turned on the third quarter," says John Canally, investment strategist and economist at financial advisory firm LPL Financial.

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With questions about the fiscal cliff and certainty on taxes and spending dominating the economic conversation, Canally says the future is of far greater interest now than the past: "I think people are a lot more focused in this quarter and the next year than on the third quarter."

Specifically, he says, people and businesses alike want more certainty not only on what their future taxes are going to look like, but they want to know that Congress has reached a firm, long-term decision.

"I think what would help to raise the growth profile is if you were to put a set of long-term budget fixes in place, getting people certainty around the tax code [and] getting people certainty [that] we're not going to have any more of these fake temporary fiscal cliff deadlines."

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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.