The U.S. economy grew by a stronger than expected 2% in the third quarter

10/26/2012 2:30 pm EST


Jim Jubak

Founder and Editor,

The U.S. economy grew at a stronger than expected 2.0% annual rate in the third quarter, according to numbers released by the Commerce Department this morning. That growth rate is up from a 1.3% annual growth rate in the second quarter. Economists surveyed by Bloomberg were expecting 1.8% growth.

Although, actually, after yesterday’s numbers showing that orders for capital goods—the stuff companies use to make other stuff—fell in September, I’d bet that many economists were expecting an even lower figure today than they gave Bloomberg at the time of that survey.

The higher than expected growth rate was made up of solid fundamental numbers on consumption and investment in housing—and an unexpected increase in government spending.

Spending by consumers rose at a 2% year over year rate. (That was up from the 1.5% rate in the second quarter.) What the Commerce Department calls residential investment—but which we call home buying—rose at a 14.4% annual rate. That’s the strongest gain since the expiration of the first-time homebuyer tax credit.

Government spending increased at a 3.7% rate, ending eight consecutive quarters of decreases. The bulk of that came from a 13% increase in defense spending by the Federal government. State and local government spending didn’t fall much—just 0.1%--but that was enough to put the category in the negative camp for the twelfth consecutive quarter.

The quarter would have been even stronger except for the drought in the Midwest. That looks like it subtracted 0.4 percentage points from third-quarter GDP. That was a slightly bigger ding than the 0.2 percentage point cut in second quarter GDP due to the drought.

There is one thing that troubles me in the numbers: The annualized 0.8% drop in disposable income (adjusted for inflation) during the quarter. It’s hard for me to see how consumers can keep powering the U.S. economy if after-inflation incomes are dropping. The gain in disposable inflation adjusted income was an annualized 3.1% in the second quarter, which leads me to suspect that some of the strength in third quarter consumer spending reflects that earlier increase in disposable income.

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