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By Jason Stipp and Robert Johnson, CFA | 11-29-2012 10:00 AM

Recovery: Slow But Durable

Economic growth in the current recovery has been about half of prior recoveries, but it's lasting longer, says Morningstar's Bob Johnson. Plus, get Bob's take on the 3Q GDP revision and his 4Q GDP outlook.

Jason Stipp: I am Jason Stipp for Morningstar. As expected the second read on third-quarter gross domestic product showed a jump from 2.0% to 2.7%. Here to talk about what was behind that jump in the second read of GDP, and what we may expect for the fourth quarter and beyond in the economy is Morningstar's Bob Johnson, our director of economic analysis.

Thanks for joining me, Bob.

Bob Johnson: Great to be here.

Stipp: We did get the jump, it maybe wasn't quite as high as some of the economists had expected, but it was a sizable jump from 2.0% to 2.7%. This is the second read on third quarter GDP. What was your take on that 2.7% number?

Johnson: First of all, let's talk about the number generically, the 2.7%. It came from the same sources as we saw in the first read really, which is a good consumer and a poor business-spending environment. Business structure spending on equipment and software were week; consumer consumption was relatively strong. And then there was a bigger-than-usual kicker, if you will, from government spending.

Stipp: And inventories was another one that was kind of behind some of the adjustment factor, but that's not necessarily entirely good news, right?

Johnson: Right, exactly. So, as I mentioned, the key themes really kind of really held, but this time we've got some jumps in the individual categories between the first read and the second read. And consumption came down from a little over 2% to under 2%, so that was the bad news that consumption was a little weaker. But some of that was gasoline spending going down, which is, I believe, a good thing for the economy.

The second thing that was really notable in the report, as you mentioned, was inventories. There was a very big swing there, and there is always kind of an interaction between inventories and imports/exports. Things kind of come in and they tend to go into inventories or out of inventories. So, we knew there was probably some good news coming in exports, which actually is a little less good than we thought than imports, but we've got some better news than we expected on the inventory data. And of course, some people will posit that inventory is piling up on the shelves and blah, blah, blah, blah, we've got a soft economy. And that's really not what I believe is happening here. I think we've had some changes in production to just move things around it a little bit.

Stipp: And government is also a big contributor in the first read. That stayed the same, but at 0.7% that's a pretty big number for the government contribution. What's your read on that?

Johnson: It's probably not likely that it will recur. It's mainly at the federal level, and it's mainly from the defense spending portion of the number, which had a big jump. The end of the fiscal year is September for the government, so that may have contributed a little bit to how the number looked in the September quarter. Certainly, I wouldn't expect defense spending to be up in the fourth quarter, so that's going to be a headwind that we're going to have looking into the fourth quarter.

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