We have gotten several pieces of better economic news over the past couple of days. The Bureau of Economic Analysis announced Friday that U.S. Gross Domestic Product (GDP) increased 2.5 percent in the third quarter. This is nothing to write home about, but was its best showing in a year. We do have to be a little careful with this because it is a preliminary estimate subject to change, but it seems clear that the economy did much better in the third quarter than it has been doing so far this year. The estimate of second quarter growth was also revised upward in this report: from 1.0 percent to 1.3 percent.
A particularly positive point in the third quarter results was that GDP growth was driven much more than it has been by personal consumption expenditures. These account for 71 percent of GDP, so they must be strong to have sustained growth in the overall economy. Consumption growth has been doing a slow fade all year, but accelerated to 2.4 percent from 0.7 percent in the second quarter.
Consumer confidence is important because personal consumption is important; without improvement in confidence, we can’t have sustained growth in consumption. Here the news is less good. The Thomson Reuters/University of Michigan Consumer Sentiment Index was also released Friday; this was expected to fall, but rose instead. However, consumers remained pessimistic about both economic policies and their own finances. These concerns translated to a decline in another consumer confidence index — that of the Conference Board.
Another development this past week is very positive: the agreement to contain the European debt crisis. This agreement does not totally solve the problem because contuing weakess in the Greek and Portuguese economies could lead to more financial troubles down the road. The agreement does, however, reduce the risk of imminent default by the struggling governments. Default and its economic consequences would have had serious impacts on the U.S. economy and banking system.