10/26/12 8:54 AM – Comments on GDP Report – Up 2%

The first estimate of 3rd quarter GDP (Gross Domestic Product) is in. This is the measure of US economic growth. It was expected to be 1.8%, up from the previous quarter’s 1.3% but instead came in at 2%.

There are a number of reasons not to get too excited about this number.

It is the first estimate and the government only has data for 2 of the 3 months for the quarter, so 1/3 of this number is a guess

In recent quarters, subsequent estimates have tended to lower the original number

Inflation was up 2.9% which is higher than we would like

Federal spending surprisingly jumped from a negative number in 2Q to a huge 9.6% this quarter, partially due toy a big jump in defense spending. The leap in federal spending for 3Q is puzzling, especially since the federal government has been laying people off this year. And, more spending is not what we want from our government because it leads to a bigger deficit and more borrowing which have become huge problems.

Business spending was off 1.3%. That is not good because business spending is the most important driver of our economy. CEOs are saying that they have put the brakes on spending, worrying about the effects of the January fiscal cliff. So, the the 4Q report is likely to be dragged down by lower business spending.

There is some good news in the GDP report. Housing and the consumer were bright spots and state government spending was very slightly lower. And, 2% or anything in the mid 1% range is still better than what we are seeing in many major developed economies.