The BEA released its advance estimate of third quarter GDP this morning. According to the report, GDP grew at an annualized pace of 2.5 percent:
Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.5 percent in the third quarter of 2011...
The acceleration in real GDP in the third quarter primarily reflected accelerations in PCE and in nonresidential fixed investment and a smaller decrease in state and local government spending that were partly offset by a larger decrease in private inventory investment.A growth rate of 2.5% is about what would be expected in normal times. Thus, at this rate of growth we will be able to keep up with population growth, but it isn't enough for the economy to reabsorb the millions of people who have lost jobs in the recession. For that to happen, we need growth rates much higher than this, temporarily, and even at 4 percent it would take years for all of the displaced workers to find jobs.
Thus, the danger here is that policymakers will read this report as pointing toward higher growth in future quarters and become complacent. After all, the two quarter trend points upward. But it's just as likely -- perhaps more likely -- that we are settling into a period of lackluster growth which will be just enough to keep things from getting worse, but not enough to make thing better. And if we wait until we know for sure what this report portends, and if we don't see even stronger growth, then we will waste valuable time and prolong the misery. For that reason, policymakers still need to push forward with help for the economy.
Turning to the report itself, the strong growth in non-residential investment is encouraging, that's a sector that often helps to lead us out of troubled times, and the growth of consumption expenditures is also notable. In addition, the drag from reductions in state and local government employment and spending seems to have abated somewhat (though it's still present, and an increase in defense spending helped to offset the problems from the ongoing declines at the state and local level).
However, the good news is also the bad. If consumption and investment are so strong, and if the drag from the loss of jobs at the state and local level is easing, or at least being offset elsewhere, and we can still only muster 2.5 percent growth, where will we get the additional push that is needed? Where will we get the growth needed to increase growth rates to a level that can reduce the large stock of unemployed workers?
The news could have been worse, but it still points to a long, agonizing recovery for labor markets and policymakers should not conclude that they are off the hook.