The markets may not be ready for the information the government is going to hand them on Friday morning in the form of the third-quarter

GDP report.

The stock and bond markets are expecting an economic slowdown, resulting from slower rates of spending by both consumers and businesses. Perhaps they'll get one. But a slowdown is less of a slowdown if the current growth rate is high. That's where the third-quarter GDP report comes in.

The third-quarter GDP report won't tell us anything about what's going on in the current quarter, or what might happen in future quarters, but it provides the context in which any slowdown will have to be evaluated. And economists say the markets may not be prepared for the high rates they may see there.

In short, the report might come as a pleasant surprise to the stock market, which economists say is pricing in serious weakness in both consumer and business spending. That means bond investors should beware; the weakness in the stock market has been a great boon to bonds these last several weeks, as investors have interpreted falling stock prices to be a harbinger of economic weakness.

The report will show that "we have a tremendously strong economy that can work its way through some pretty negative shocks,"

Lehman Brothers

senior economist Ethan Harris predicts. "That might be comforting to a stock market that's been looking for bad news in every corner."

GDP has many ingredients, but it can be boiled down to a couple of essential questions: How fast is consumer spending -- the largest component of GDP, accounting for about two-thirds of economic activity -- growing? And how fast is business spending on plant and equipment -- the second-largest component, accounting for about 20% -- growing? The stock market may be pleasantly surprised by what it sees on both fronts.

In the first quarter, GDP grew at a 4.8% rate. Consumer spending grew at an astounding 7.6% rate, the fastest pace in 17 years. Business spending on plant and equipment grew at a 16.3% rate, the highest in two years. Offsetting those gains were a big drawdown in business inventories and an expansion in the trade deficit.

In the second quarter, the picture shifted. The overall GDP growth rate rose to 5.6%. But consumer spending slowed to 3.1% and capital spending slowed to 11.2%. The overall growth rate got nearly as big a boost from the replenishment of business inventories as it did from consumer and business spending. Once again, the trade deficit widened, whacking a percentage point off the growth rate.

For the third quarter, economists polled by

Reuters

are forecasting a GDP growth rate of 3.4%, on average. The weakness, they say, will come chiefly from an inventory drawdown, a slower rate of government spending to correct for the very fast second-quarter rate and an outright downturn in the pace of residential investment -- homebuilding.

But both consumer and business spending were strong during the third quarter, economists say. Stronger, perhaps, than stock investors realize. Forecasts for the pace of consumer spending in the third quarter are clustered between 4.5% and 5%. And capital spending probably grew by approximately 10%, economists say.

TheStreet Recommends

"I think it's going to show that we had solid underlying demand from consumers and businesses,"

Daiwa Securities

chief economist Michael Moran says.

The consumer spending rates for the first and second quarters average out to 5.4%. A third-quarter rebound to a somewhat slower pace would nonetheless indicate impressive resilience on the part of consumers, who in the third quarter faced the irksome twosome of falling stock prices and rising oil prices.

As for business spending, while a rate of 10% would represent a slowdown, it would still be above average (the average for 1995 to 1999 was 9.2%). "We've heard all the talk about a potential credit crunch," Lehman's Harris says. "But the reality is, the underlying data through the third quarter remain very strong. So, the hit you're going to get from credit and financing issues comes on top of incredible strength."

The stock market may not be prepared for that kind of news, particularly on capital spending, where a 10% growth rate might come as a shock,

Goldman Sachs

senior economist Ed McKelvey says. "If you stack that against market perceptions of the capital goods business, no one would think that's in the offing," he says. "This report, to the extent that people pay attention to it, could make people say they didn't know things were that firm."

There's no simple way of discerning the capital spending rate the stock market is discounting, McKelvey says. "But if you go by what analysts are saying, it would be an open question in their minds whether these numbers are positive or negative, as opposed to an increase of 10%."

In a more general sense, the numbers could challenge the view that the wheels are coming off the economy. That should benefit stocks, Lehman's Harris says.

The forecast growth rates "would be a continuation of the flow of data suggesting that the underlying economic fundamentals are positive," he says. "That what we're seeing in earnings is moderation, not collapse."

Market reaction to the numbers could be complicated by a couple of factors, economists also note.

To the extent that the report throws cold water on expectations that the

Fed will cut interest rates in the next several months, it could cut prices and boost yields in the bond market, which could in turn stall a stock market rally.

Also, from a bond market perspective, strength in capital spending is less threatening than strength in consumer spending, because high rates of business investment in new plant and equipment are associated with high rates of productivity, which are anti-inflationary.

It's only when high rates of capital spending translate into quickly rising stock prices that they threaten to lead to higher inflation, Daiwa's Moran says. "Business investment is what's driving productivity growth," he says. "But you're also getting a consumer demand kick from the wealth effect" as stock prices rise. "That's what runs the risk of straining capacity and stirring inflation."