U.S. ECONOMIC GROWTH SHOULD KEEP IN PRIVATE / THE WALL STREET JOURNAL

Heard on the Street

U.S. Economic Growth Should Keep in Private

GDP Could Mask Economic Strengthening in Fourth Quarter

By Justin Lahart

Oct. 30, 2014 4:12 p.m. ET

Viewed through the prism of gross domestic product, the U.S. economy looked better in the third quarter than its underlying performance really was. The fourth quarter could be just the opposite.

GDP grew at a robust 3.5% inflation-adjusted annual rate in the third quarter, the Commerce Department reported Thursday. That was better than the 3.1% forecast by economists. But that unexpected performance was due to a 16% jump in military spending that will probably reverse in the current quarter. A narrowing trade gap also provided a boost that probably won’t be repeated.

To exclude the often volatile effects of swings in government spending, trade and business inventories, some economists keep track of private domestic final purchases. This measures combined household and business spending. Forecasting firm Macroeconomic Advisers calculates that this gauge of private spending grew at a 2.3% annual rate in the third quarter—substantially weaker than GDP.

In the fourth quarter, private spending should do better. With the job market showing signs of acceleration and gasoline prices falling, consumer spending will likely pick up. Residential investment—money spent on new homes and other housing related items—looks likely to improve after a soft third quarter. With the willingness to hire likely paired with a willingness to invest, business spending should stay firm. Macroeconomic Advisers forecasts that GDP growth will slow to 2.4%, but that private spending will grow by 3.2%.

Put differently: While GDP looks poised to slow in the fourth quarter, this may mask an economy that is actually gaining in strength. Investors focused too much on where the headline number is heading risk ending up wondering what they missed.