Today, the Commerce Department’s second estimate of third quarter GDP growth showed that the economy advanced at an annual rate of 2.5 percent from the prior quarter. Faster growth in consumer spending on goods, business investment, and exports, along with a smaller decline in residential investment collectively added to the pace of economic growth in the third quarter, revising upward from the 2 percent advanced estimate reported last month.

Real GDP has now expanded for five straight quarters and, over the past year, the economy rose by 3.2 percent — the fastest year-over-year pace since the first quarter of 2005. Still, much of the growth over the past year was concentrated in late 2009 and early 2010, when the inventory cycle and fiscal stimulus measures were providing significant support to the economy.  In the third quarter, GDP growth was good, but not great, and not strong enough to make a significant improvement in the labor market, where private sector job growth averaged just 122,000 per month.

On the positive side, business investment in equipment and software — which increased by 16.8 percent in the third quarter –continued at a double-digit pace for a fourth consecutive quarter, and is a hopeful sign that businesses are starting to be confident enough in the recovery  to modernize operations. Historically, business investment has tended to lead employment growth by a few quarters.  So, today’s report is an encouraging sign that the labor market could start to improve more significantly in 2011.

Export growth moderated to a pace of 6.3 percent in the third quarter from 9.1 percent growth in the second.  It is important to note, however, that over the past five quarters, exports rose by 15.9 percent, the fastest pace in more than a dozen years. This export growth has been especially important for manufacturers, who produce the majority of U.S. goods and services sent to markets abroad, and one of the critical factors that has enabled manufacturing to begin to climb out of the deep recession that took place in 2008 and 2009. 

Looking ahead, export growth will continue to be a key indicator for the health of manufacturers.

The Department of Commerce today released the third quarter Gross Domestic Product figures, reporting that the GPD rose 3.5 percent in the quarter. (News release, Sec. Locke statement.) While this upturn is encouraging, it was due mainly to temporary factors and is just another signal of the beginning of a long, slow crawl by manufacturers to get back on their feet.

Motor vehicle output increased at an annual rate of 158 percent and accounted for nearly half of the upturn in GDP. This was due to the Cash for Clunkers program which provided a temporary spark to the economy. Therefore, we can expect a payback in future quarters due to this third-quarter surge in auto purchases. At the same time, the tax credit for first time homebuyers provided a boost to the 23 percent increase in residential investment last quarter.

The 14.7 percent rise in exports in the third quarter report was the most encouraging sign for manufacturers. While this increase was likely elevated by increased demand in trade for motor vehicles, the improved economic conditions abroad combined with the declining dollar indicates that exports will be a durable component of an economic recovery in coming months.

The improved export climate signals that when the economy gets fully back on track in the latter half of next year, the recovery is likely to be stronger than the recovery following the 2001 recession, when exports were anemic due to an overvalued dollar and weak growth abroad.

While this is a positive development, it is also important to note that we are still in the very early stages of recovery.