The Bureau of Economic Analysis (BEA) released the third (and final) estimate of real GDP growth for the third quarter of 2012. Growth was revised to a seasonally adjusted annual rate of 3.1%, up from 2.7% in the second estimate (last month) and 2.0% in the advance estimate (October), a marked improvement from the second quarter pace of 1.3%. The revision was largely due to upward revisions to personal consumption expenditures (PCE), exports and state and local government spending, and a downward revision to imports, which reduce output growth.
Real GDP growth above 3% represents a more self-sustaining and momentum generating recovery, but the composition of this upgrade could be better. The uptick in PCE is a positive but the 1.6% pace is still low relative to a more robust recovery. Exports can be expected to slow with a slowing global economy, and the modest increase in state and local government spending is in contrast to the string of declines since the official end of the recession in mid-2009. Similarly the decline in imports is at odds with recent trends.
But in a reprise of last month’s commentary (Fiscal Cliffhanger), the source of the greatest uncertainty about economic growth in the near term is the fiscal cliff, the combination of tax increases and spending cuts scheduled to take effect absent some agreement between the Administration and Congress on an alternative. Surveys of business leaders and consumer confidence indicate that this uncertainty is already restraining economic recovery by holding back hiring, investment and consumption. The consensus is that a complete breakdown in negotiations and full implementation of these policies would most likely tip the economy back into recession, but also that this worst case scenario will be avoided and some agreement will be reached.
Our forecast assumes that the fiscal cliff will be largely avoided, but that some fiscal tightening will occur. We’ve lowered our forecast for growth in the last quarter of this year and the first half of 2013, but expect that more robust growth will resume in the second half of 2013.