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The US economy picked up steam in the third quarter. Following a very lackluster second quarter which featured a mere 1.3% growth, the GDP grew at 2% in the third, beating most economists predictions of 1.6%-1.9%. Government and consumer spending helped spur the economy, as business investment and exports weakened. In order to significantly lower the unemployment rate, growth of 2.5% would be needed. GDP growth for the year stands at 1.74%, which slightly trails last year's growth rate of 1.8%.
The numbers indicate the importance of defense spending in the economy. Defense spending accounted for a good deal of the increase in federal spending, jumping 13%. This followed a decrease in defense spending in the second quarter. With massive defense cuts looming in the fiscal cliff set to occur on January 1, 2013, the importance of a deal to avert the problem can not be underestimated. Defense spending has long been an important cog in our economy, a phenomenon known as military Keynesianism.
Politically, the numbers are good news for President Obama. The president can tout the new numbers as signs of continued progress. The country has now undergone three straight years of growth under his watch, including 31 straight months of job growth. Next week, the final jobs report before the election will be released. Those numbers could help sway any remaining undecided voters.
Republican challenger Mitt Romney can also use the new GDP numbers politically. Mr. Romney is already pointing out that GDP growth is only half of what President Obama predicted it would be by this time in his presidency. He stated earlier today that weak growth leads to slow job creation and declining take home pay.
This level of growth could become the new normal. The US is a developed economy that is shedding low skill jobs to third world countries. These include manufacturing jobs. The economy has shifted more towards the service sector, which does not pay as well. Fewer dollars in the hands of workers means less fuel for our consumer driven economy. The debate over tax policy and regulations may be missing the bigger picture.