But while the headline number is a big improvement, it conceals an underlying weakness. Of the total growth, 1.7 percent was due to expanded business inventories and only 1.9 percent to the key factor of real final sales. Overall demand is soft.
Macroeconomic Advisers Senior Economist Ben Herzon told the Wall Street Journal that the inventory growth was "unsustainable." Consequently, inventories are likely to build more slowly or fall in the current quarter, which means overall growth will also decline. Macroeconomic Advisers predicts fourth-quarter GDP will grow just 1.4 percent.
Lewis Alexander, chief economist at Nomura Holdings Inc. in New York, had a somewhat more upbeat view: “When you look at the relative optimism you’ve seen in the business surveys, the most logical explanation for the inventory build is a more positive outlook.” Alexander forecasts growth at 3.5 percent. Still, “the big missing ingredient is businesses being sufficiently confident to actually boost hiring and do capital spending.”
According to the Commerce Department:
The increase in real GDP in the third quarter primarily reflected positive contributions from private inventory investment, personal consumption expenditures (PCE), exports, nonresidential fixed investment, residential fixed investment, and state and local government spending that were partly offset by a negative contribution from federal government spending. Imports, which are a subtraction in the calculation of GDP, increased.Below the fold, you can read an iconic assessment of GDP as a gauge.
Because of the flaws in the way it measures economic activity, it's important to use the GDP in conjunction with other economic factors when measuring the economy's health. Robert F. Kennedy's assessment in 1968 still resonates:
"Too much and for too long, we seemed to have surrendered personal excellence and community values in the mere accumulation of material things. Our Gross National Product, now, is over $800 billion dollars a year, but that Gross National Product - if we judge the United States of America by that - that Gross National Product counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors and the jails for the people who break them. It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl. It counts napalm and counts nuclear warheads and armored cars for the police to fight the riots in our cities. It counts Whitman's rifle and Speck's knife, and the television programs which glorify violence in order to sell toys to our children. Yet the gross national product does not allow for the health of our children, the quality of their education or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything in short, except that which makes life worthwhile. And it can tell us everything about America except why we are proud that we are Americans."Inadequacies in the GDP gauge have spurred efforts to develop a better measure or supplements to it. These include France's Commission on the Measurement of Economic Performance and Social Progress, Canada's Genuine Progress Index (a version of which has recently been tried out in Maryland), the Human Development Index and the Gini coefficient.