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Growth Rate's Better, but Don't Get Excited: Economist

Bernice Napach
Friday, 26 Oct 2012 | 4:08 PM ET

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The U.S. economy picked up some steam in the third quarter. The Commerce Department reported that GDP grew at a 2% annualized rate from July to September. That's an improvement from the sluggish 1.3% pace in the second quarter but nothing to get excited about, says David Rosenberg, chief economist and strategist at Gluskin Sheff.

The higher growth in the third quarter was due to increased government spending, which is unsustainable, he tells The Daily Ticker. Factoring that out means growth was 1.3% in the private sector, virtually unchanged from the previous quarter, says Rosenberg.

Rosenberg says last quarter's growth was unusually low for historical standards.

"This is the weakest 13th quarter of an expansion that we have seen since the end of World War II," he says. The median growth rate this late in the rebound usually tops 5%, Rosenberg notes.

If government spending is responsible for about a third of GDP, what happens if Congress and the White House fail to prevent the big tax increases and spending cuts due to take effect early next year?

Rosenberg thinks there will be a Congressional agreement to limit the impact of the so-called fiscal cliff. A deal could include only half of the scheduled tax hikes taking effect.

Related: The One Headwind That Could Stymie the U.S. Economic Recovery

"GDP is all about spending," says Rosenberg. "Consumption is up 2% but real disposable personal income is growing at a 0.8% annual rate." This could mean that consumer consumption will slow and GDP growth will decline.

Related: Good Economic Data Meets Bad Earnings: Which One is Wrong?

Spending is already slowing for many companies and their outlooks are more pessimistic, according to the latest batch of earnings reports. The S&P 500 Index is down 1.6% so far this week.

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