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Third quarter GDP grew beyond expectations; personal incomes grew, but not as well as expected, while spending was down; and initial jobless claims continued to perform well.

GDP

Gross domestic product, which represents the value of U.S. goods and services, grew at an annual rate of 3.5 percent during the third quarter, outpacing expectations of 3 percent growth, according to last week’s report from the Bureau of Economic Analysis.

The big drivers for the GDP gain were government spending and particularly defense spending, which were up 10 percent and 16 percent respectively. Also, a 7.8 percent gain in export, and a 1.7 percent decrease in imports helped. Meanwhile, personal consumer expenditures grew 1.8 percent; durable goods increased 7.2 percent; and investments gained 5.5 percent. This was almost directly opposite from the second quarter, in which government spending was down, defense spending made a tiny gain, and the other, more consumer- and production-driven segments posted significantly higher gains.

That contrast, along with the fact that the increases in government and defense spending would be temporary, left some analysts wondering how GDP would fare in the fourth quarter.

“The report affirmed what was broadly believed to be the case: the economy grew at an above trend rate in recent months, extending its strong advance since early spring,” Plante Moran Financial Advisors chief investment officer Jim Baird wrote in a public statement. “While top-line growth exceeded expectations, the degree to which it was driven by likely unsustainable gains in government spending and the balance of trade takes a bit of the bloom off the rose. Stronger results in personal consumption and private investment would have been preferred.”

Personal Incomes and Spending

Personal income grew $22.7 billion, or 0.2 percent, in September and disposable personal income (DPI; income after taxes) improved by $15.7 billion, or 0.1 percent, the Bureau of Economic Analysis reported last week. The personal income gain was just short of the 0.3 percent growth the market had expected.

Meanwhile, personal consumption expenditures (PCE) dropped $19.0 billion, or 0.2 percent, in contrast to an increase of $58.7 billion. Personal outlays — which combine PCE, personal interest payments, and personal current transfer payments — dropped $14.5 billion in September, compared to an increase of $63.4 billion in August.

“The decline was on the heels of a pretty outsized gain in August so some payback should have been expected,” RBC Capital Markets LLC chief U.S. economist Tom Porcelli told Bloomberg. “The quarter ended on relatively soft footing from a spending perspective, however consumer fundamentals remain fairly sound.”

Meanwhile, savings were up for the month. Personal saving — DPI minus personal outlays — grew to $732.2 billion in September over Augusts’ $702.0 billion. The personal saving rate — described as personal saving as a percentage of DPI — notched up to 5.6 percent in September from Augusts’ 5.4 percent.

Initial Jobless Claims

First-time claims for unemployment benefits grew, but remained at very low levels. Initial jobless claims filed during the week ending Oct. 25 hit 287,000, an increase of 3,000 claims from the preceding week’s revised level of 284,000, the Employment and Training Administration reported last week.

While claims were up, they were up from a very low point. To put things in perspective, the total of 266,000 claims from two weeks ago was the lowest total for new claims since April 2000.

The four-week moving average, considered a more stable measure of jobless claims, dipped to 281,000, a drop of 250 from the prior weeks revised average.

“Claims are already low enough, when coupled with mostly robust indicators of the pace of hiring, to signal payroll gains of 250K-plus over the next few months,” Pantheon Macroeconomics chief economist Ian Shepherdson wrote in a public statement. “If that happens, the unemployment rate will continue to fall rapidly … ."