Partner Center Find a Broker

Last Friday, the U.S. Q3 2012 GDP report came in surprisingly better than expected. Is this a legit sign of life from the economy? There’s only one way to find out! Let’s examine the report.

Q3 2012 U.S. GDP ComponentsData for the third quarter of the year showed that the economy grew by 2.0% in the months of July to September. Although the actual figure only topped expectations by a measly 0.1% with the forecast at 1.9%, it’s a pretty solid number compared to the downwardly revised growth for the second quarter of 1.3%.

Looking deeper into the report, I found out that personal consumption expenditures (PCE), government spending, and residential fixed investments rose during the quarter. However, exports, non-residential fixed investments and private inventory investment dropped.

Initially, analysts celebrated the report. But a closer examination of it caused their smiles to turn upside down into frowns. Apparently, the U.S. economy is far from being in tip-top shape!

For instance, the exports component of the GDP report actually revealed that there was a 1.6% decrease in Q3. This might not seem much at face value, but it marked the first decline in exports in more than 4 years.

But what really makes it worse is that that the decline in exports came despite 3% depreciation in the effective exchange rate of the dollar. The depreciation of the dollar should have been positive for exports, but it wasn’t. Remember, whenever the value of the domestic currency falls, the exports of the country becomes more competitive and affordable for other nations.

Personal consumption, which makes up around two-thirds of the GDP, wasn’t anything to be impressed about either. Even though it contributed 1.43% of the 2.00% growth, personal consumption only rose 1.03% from the previous quarter. Moreover, personal consumption was also lower than the average of the last 12 quarters.

And lastly, the jump in federal government spending was on national defense and the military. Money wasn’t spent on schools, roads, and other important infrastructure.

In fact, the contribution to GDP growth from state and local government was only at a measly 0.01%. And with the war in the Middle East dying down, it’s unlikely that this kind of spending will hold for very long.

All in all, the advanced headline GDP figure isn’t what it’s cracked up to be. Underneath the surface, you can see that there’s still underlying weakness in the U.S. economy. Hopefully, Q4 (and beyond) will be much better.