The nation's total output of goods and services increased at an annual rate of 3.1% during the third quarter of this year—a rate much healthier than the 1.3% gain recorded during April-June of 2002. This provided reassuring —and much-needed—evidence that the economic recovery isn't "dead-in-the-water" despite the recent rough patch. Growth in consumer spending was more than twice as strong in the third quarter than during the second quarter. This was due almost entirely to the spike that auto sales got from unsustainable zero-percent financing incentives by automakers.

Economic expansion during the third quarter of 2002 could be attributed entirely to actual growth in demand for goods and services. It was not just due to the fact that businesses were anticipating a pick-up in end-market demand and were building inventories from severely depleted levels. After accounting for most of first-quarter GDP growth and all of the second-quarter gain, inventories actually had a small net-negative impact on third quarter GDP, with the value of final sales of goods and services posting an increase of just 3.2%.

The specific GDP component that captures the trend in capital spending by U.S. companies made a breakthrough during the third quarter of this year. While the annualized increase in total business investment spending (equipment, software and buildings combined) was a paltry 0.6%, the July-September gain represented the first time since the third quarter of 2000 that there has been any increase in this critical measure. The increase is especially significant because of its positive long-term implications for a more broadly based (not consumer-exclusive) economic recovery.

Without question, the most significant piece of news to come out of the third quarter report was the fact that business spending for new equipment and software increased at a 6.5% annualized rate—following a 3.3% gain over the April-June quarter. Prior to this, equipment spending had declined for six consecutive quarters at a discouraging average annualized rate of 7.1%. With businesses now (albeit cautiously) "buying into" the recovery, the "double dip" recession scenario is no longer plausible—although GDP growth will slow until Iraqi tensions are defused.