What 3.5% GDP growth means

What can we learn from this morning's surprisingly strong 3.5% real GDP growth report?

1) Goldman Sachs does not know all. The bank's economists had been on eerie run of sending out prescient alerts the day before major data releases—mainly the monthly employment numbers—that described in detail how the consensus was going to be wrong and what the report was really going to say. Well, last night I got the e-mail from the nation's "Most Accurate Economist," Goldman's Jan Hatzius, predicting that GDP growth would be a below-consensus 2.7%. Oh well.

2) Expect a pullback later. Hatzius had predicted that GDP would be lower than expected in the third quarter because companies had cut back their inventories more than most people expected—which was good news for the fourth quarter, when inventories would presumably fall less or even rise. Instead, inventories fell by less than expected. Meaning that we now probably can't expect a big inventory boost in the fourth quarter. Also, the cash for clunkers program contributed in a big way to the quarter's growth—GDP growth excluding motor vehicle production was just 1.8%—and it won't in the fourth quarter or next year. Gee. No, GDP.

3) We're probably out of the recession, but it's still impossible to tell if we're in much of a recovery. This is partly because of a litany of cautionary notes that need to be sounded every time a GDP number, especially an "advance estimate" like today's, comes out. Some economic releases—like the weekly jobless claims number released today—are raw data. Many others involve some extrapolation from a survey sample, but are still effectively data releases. GDP, by contrast, is an estimate, put together by perhaps the most understaffed of government statistical agencies, the Commerce Department's Bureau of Economic Analysis, with data from a plethora of sources and a bunch of guesswork. It will be revised in a month, revised again a month after that, then revised again a couple years down the road. The final number could end up pretty much anywhere between 1% and 6% (or even beyond: the initial GDP growth estimate for the first quarter of 2000 was 5.4%; it has since been revised all the way down to 1.1%). And even that final number will involve estimates and assumptions (especially those involving the inflation rate) that some might take issue with. Beyond all that, there are the usual questions about whether high unemployment, continuing financial troubles or other factors might drag the economy back down in the coming months.

4) +3.5% is better than -6.4%. After all those cautionary notes, it seems only right to point out that even this doubtful recovery is a lot better than the freefall we were experiencing at the beginning of the year—and it's a lot better than just about anybody was forecasting 9 months ago.

5) It's the jobs numbers that matter. You can't eat GDP, or pay your mortgage with it. And of course there are all the measurement problems outlined above, plus questions about whether GDP really measures the right things anyway. So the economic indicator that matters most these days is probably the monthly payroll employment number (October's is due out a week from Friday). If that stops falling, then maybe we can start celebrating a little.