US GDP Growth Accelerates in Q3

US real GDP grew at a 2.5% annual rate in Q3, according to the BEA’s advance estimate, nearly doubling Q2’s growth rate. Strong contributions from consumption, particularly durable recreational goods and vehicles, health care, housing and utilities helped offset a negative contribution from inventory drawdown. Business investment in equipment and software, as well as export growth, also had strong positive contributions. Government spending continued to flag (in our view, an overall positive), with defense spending offsetting declining federal civilian spending and state/local cutbacks.

The other major detractor was inventories, which remained at bare-bones levels. But this isn’t wholly negative as it pertains to potential forward-looking implications. As we’ve written, with the inventory-to-sales ratio at super-low levels, even an incremental uptick in demand could necessitate restocking—which would be quite buoyant to production and output.

Exhibit 1 details each component’s year-over-year growth rate and contribution to the headline growth rate.

Exhibit 1: Q3 2011 GDP “Advance Estimate”

Source: US Bureau of Economic Analysis.

Exhibit 2 shows growth in some major components’ growth in recent years.

Exhibit 2: Key US GDP Components (Q1 2003 = 100)

Source: US Bureau of Economic Analysis.

Finally, Exhibit 3 shows headline real US GDP growth—note the accelerating growth this year to date.

Exhibit 3: Headline Real US GDP Growth Rates (Annualized Quarterly Change)

Source: US Bureau of Economic Analysis.

As we’ve often said, there’s no such thing as a market “all-clear,” and economic growth will likely continue fluctuating—and that’s very typical. And since this estimate is subject to revision, the final growth rate may end up lower or higher. But for now, it strongly suggests the economy is stronger than many think, and sentiment is highly detached from reality—leaving plenty of room for data to surprise to the upside, which could provide a nice tailwind for stocks in 2012.