Damning by Faint Praise: A Mood-Stabilized Look at 3Q GDP

Fears of a double-dip recession in the U.S. receded temporarily Thursday after Washington said consumers bought more appliances and businesses spent more on construction this past summer.

The third-quarter gross domestic product report helps offset the gloom that fell earlier this week when the Conference Board said U.S. consumer confidence fell to its lowest level since March 2009.

Along with hopeful news from Brussels about progress in solving Europe's debt crisis and decent corporate earnings, investors have are having a classic feel-good moment: France's CAC 40 and Germany's DAX is soaring more than five percent on the news; and U.S. stocks are up more than two percent.

So enjoy the moment - or trade on it - while you can.

For one thing the third-quarter's 2.5 percent growth, up from the second quarter's 1.3 percent gain and the first quarter's 0.4 percent increase, won't so much as dent unemployment. We're going on five months of nine percent-plus joblessness with zero evidence of a change agent. Consider, too, that unemployment claims through October have remained in the 400,000 to 410,000 range.

Up close, the report carries warnings. Net exports contributed a smaller-than-expected +0.2 percent, while the negative contribution from inventories was a much larger-than-expected -1.1 percent. There also was inventory accumulation, often a precursor to economic weakening.

There are big-picture reasons to curb one's enthusiasm. Incomes are not growing and housing values are stagnant or falling. On a year-over-year basis home prices are down 10.4 percent and there remains a glut of unsold residences.

Add to all of the above the fact the U.S. central bank has begun a public relations campaign, led by Fed Vice Chair Janet Yellen and New York Fed President William Dudley, to prepare the public for more money printing. If the economy was in a believable recovery, the Fed would leave well enough alone.

Third quarter GDP data carry limited implications beyond the near term, though the compositionof today's report is somewhat favorable for the fourth quarter, said Citi analyst Steven C. Wieting in a note. Weak income trends and unfavorable financial conditions still suggest some slowing, with policy issues the larger question for2012.

Finally, to return to the intransigence of U.S. joblessness, even if the economy can sustain the third-quarter's growth, it leaves the unemployed right where they are. Last August the Congressional Budget Office predicted that GDP would rise at a yearly rate of 3.6 percent between 2013 and 2016. But even at that respectable clip, we only get back to full employment in 2017.

Anything less than a 3.6 percent GDP growth rate extends unacceptably high rates of unemployment into the next decade.

In other words, any authentically mood-stabilized assessment of the third-quarter GDP figure risks damning it by faint praise.