The first look at GDP for the third quarter showed the economy grew at a 2.0% annualized pace, an improvement over the prior quarter. The result, which was slightly higher than consensus expectations, comes amidst a disappointing earnings season in which more than half of the companies that have reported have fallen short of their expected revenue targets.
By any objective expectation, the most positive spin that can be put on today’s report is that the economy may have improved modestly, but continues to struggle with lackluster growth in a disappointing expansion. Consumer confidence edged higher in recent months, and that improvement in mood contributed to a bit less frugality. This contributed to a pick-up in retail sales since June, as consumers were a primary contributor to growth.
Business investment remains a significant area of concern, as corporate America clearly remains hesitant to ramp up capital expenditures. This speaks volumes about their lack of confidence about the outlook for the economy and the need for greater clarity around fiscal policy.
Investors reacted positively to the Federal Reserve’s September decision to further ease monetary policy, although much of the surge in stocks came in advance of the actual announcement. Nonetheless, the recent rally in stocks shouldn’t lull investors into a false sense of confidence that the economy couldn’t falter further from here. Certainly the economy is not out of the woods.
Slowing global growth remains a concern and a headwind to growth in the U.S. as well. Meanwhile, the need for policymakers in Washington to tackle the impending fiscal cliff and once again raise the federal debt ceiling looms large. Even in the aftermath of the impending election and whatever message that voters send, it’s highly unlikely that the process of addressing these critical issues will be a smooth one. The question then is what policymakers will do and what a compromise would look like. In the interim, investors are left to speculate about how significant the economic impact of the cliff will ultimately be.
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