Advance Q3 Estimate: Defense Spending Surge Drives Slightly Higher GDP Growth

Is this good news? The advance estimate of Q3 Real GDP, released on October 26 indicates a 2.0% rise in real GDP: Still pretty tepid but higher than the 1.3% growth in the second quarter. But, you may want to keep the celebration in check – the major part of the increase was driven by a large 9.6% increase in Federal Government spending and a big part of that was defense spending: National defense spending rose 13.0%. Overall, the increased Federal spending accounted for .7% of the 2% growth in real GDP essentially all of the increase since the second quarter.  Note that government spending rose 3.7% overall, the first increase in 8 quarters. The last time government spending fell for 8 consecutive quarters was the unwinding of the Korean War, from 1953:Q3 to 1955:Q2.

There is a legitimate question about whether increased growth fueled by government spending that is financed by borrowing has welfare implications that we should be happy about. This is a hotly debated issue and is particularly pertinent since other aspects of the economic picture were quite weak. Gross private domestic investment was weak, growing at just 0.5%, with investment in non-residential structures declining at 4.4% and equipment and software investment flat at 0.0%. This counters somewhat the revival of residential investment that has been the subject of much publicity. The upcoming jobs report for October will help to sharpen views about the recovery.



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