Consistent with our forecast, third-quarter gross domestic product (GDP) increased at a 2% seasonally adjusted annual rate. Personal consumption expenditures, government spending, and residential fixed-investment all made contributions to growth. This is the first time since the second quarter of 2010 that government spending made a positive contribution to growth. Nonresidential fixed-investment—like spending on equipment and software by businesses—made negative contributions to growth. This pattern may persist in the fourth quarter of 2012 but completely reverse in 2013.
It’s no secret that third-quarter economic activity was slow—though, not as slow as the second quarter. Many business executives have been blaming three things for the slowdown: (1) Uncertainty about the U.S. election; (2) the slowdown in the Eurozone; and (3) the slowdown in emerging markets growth. Well, guess what: Executives will need to come up with new excuses over the course of the next year if they continue to sit on their hands and liquid assets. The U.S. election will be a thing of the past (though the 2014 mid-term election will be right around the corner). Greece reportedly received a two-year extension to meet its budget goals, and eurozone governments are backing off some of the rapid austerity measures to take a tamer, more rational approach to reaching budget targets. And the slowdown in the emerging markets is likely directly due to the slowdown in spending in the eurozone, so that problem should fade.
From 2001 to 2006, there was a boom in investment spending in the U.S. A disproportionate chunk of that was on housing, which didn’t really provide the basis for more rapid economic growth in the future. Investment spending on property, plant, and equipment by businesses builds the foundation for productivity growth and higher standards of living. There was then a collapse in investment spending during the financial crisis, but there continues to be a nice bounce in investment spending while the portion devoted to housing has fallen significantly.
Source: Bureau of Economic Analysis.
The economic recovery that began in 2009 was driven by exports and manufacturing. Consumption and housing are now the drivers of growth. In 2013, as businesses begin to deploy their hoards of liquid assets, the recovery should be investment-driven. While the fourth quarter of 2012 could post a 2.5% rate of growth, a 3% growth rate for 2013 is not unreasonable.