The U.S. economy grew at an annualized 2.0% rate in the third-quarter, the Bureau of Economic Analysis reports in its initial GDP estimate for the July-to-September period. That’s an improvement over Q2’s sluggish 1.3% pace, and another sign that recession risk in recent months was considerably lower than the dire warnings issued by some analysts.
No one should mistake today’s GDP update as a sign that the economy has broken free of the slow-growth gravity that’s prevailed of late. But once again we have another data point that supports what’s been fairly clear all along: the economy continues to grow, albeit modestly.
Is the improvement in Q3 GDP a surprise? No, not really. As I’ve been discussing over the past month, the incoming data has been telling a fairly consistent story of moderately stronger growth. From the ongoing rebound in housing to continued strength in industrial production to the persistence of slow but steady jobs growth, the overall picture for the economy has been strong enough to keep us out of a recession so far. This relatively encouraging profile was also showing up in last week’s final GDP nowcast before the release of today’s report—a nowcast that pointed to a decent improvement in the growth rate of the economy in Q3 over Q2. It was a similar story earlier in the month, as this October 8 GDP nowcast reminds.
As a recap, here’s how The Capital Spectator’s GDP nowcasts evolved over the past month (for details on methodology, see the definitions at the end of this post):
The case for thinking that the relatively upbeat nowcasts have been reliable signals is strengthened by the record of the regular updates for The Capital Spectator Economic Trend Index (CS-ETI), which continued to offer statistical support for arguing that recession risk through September was relatively low. Last week’s CS-ETI review, for example, made it clear that the odds are minimal that the NBER would declare September as the start of a new downturn. That’s in sharp contrast with some analysts who have been arguing that we’re already in a recession.
None of this should be used as an excuse for complacency. There are (still) several large risk factors lurking on the macro landscape, including the potential for economic turmoil if the so-called fiscal cliff threat isn’t resolved.
The future, as always, is loaded with uncertainty. The recent past, by contrast, is relatively clear. As it turns out, a careful analysis of what just passed can usually provide quite a lot of strategic value for analyzing the risks in the immediate future. As Yogi Berra famously quipped, you can see a lot just by looking. In the context of the business cycle, it’s critical to be looking at a broad data set and in a way that minimizes short-term distortions and revision risk. Even so, there are still no iron-clad guarantees. But you can do quite well by keeping a close eye on the incoming numbers and interpreting the data with basic econometric tools. For different reasons, that’s less than standard operating procedure in the grand scheme of macro commentary.
Yes, the potential that the indicators are misleading us can never be wiped away entirely. That inspires looking at the numbers from several angles, using different models and techniques in search of deeper perspective. Short of a bolt from the blue, a relatively unbiased, econometric-based review of the data that adds up to the business cycle can reveal a lot.
The economy will, of course, one day weaken and a new recession will arrive. When it does, and that change for the worse is clear by way of the numbers, you’ll read about it here. Could it happen with the October economic profile? Yes, that’s a possibility. But with no major economic reports for this month available yet, a dark forecast remains highly speculative. Clarity, of course, is coming. Meantime, there’s still some growth momentum to consider. That’s not everything, but it’s surely something.