By Dirk van Dijk of Zacks.com

NEW YORK ( TheStreet) -- In the third quarter, the economy grew at an annual rate of 2.0%, up from 1.7% in the second quarter, but down from the 3.7% pace in the first three months of the year. The growth rate was in line with consensus expectations, and frankly a bit better than I was expecting.

So how did we get to the 2.0% overall growth? What parts of the economy were growing and thus adding to growth, and which parts were acting as a drag on growth? Since the different parts of the economy are of very different sizes, and some tend to be relatively stable, while others can be very volatile, I will focus on the contributions to growth.

In other words: growth points, not the percentage growth rates. After all, a small percentage change in a very big part of the economy can have more impact than a big percentage change in a small part of the economy. I will follow the familiar Y = C + I + G + (X - M) framework, where Y = GDP, C= Consumption, I = Investment, G= Government, X = exports and M = imports.

C for Consumption

The biggest part of the economy by far is the Consumer or consumption, or to be more specific, Personal Consumption Expenditures (PCE). It represented 70.4% of the overall economy in the third quarter, and was the biggest growth driver. PCE contributed 1.79 growth points, up from 1.54 points in the second quarter and 1.33 points in the first quarter.

The increasing contribution to growth from C is generally a good thing, at least in the short term. Over the long term, though, our economy is already weighted far too much towards C, and that contribution has been rising over the years.

Goods vs. Services

Consumption can be broken down into two main categories: goods and services. Services is by far the biggest part of consumption at 67.15% of PCE and 47.30% of overall GDP. It was the real star of the show this quarter, chipping in 1.15 growth points -- up from just 0.75 points in the second quarter. In the first quarter, services were missing in action, adding just 0.03 growth points. This solid increase is very encouraging.

Services tend to be "produced" domestically, not in China, and also tend to be more labor-intensive than goods-producing jobs. Normally demand for services is more stable than demand for goods, especially durable goods.

Within the consumption of goods, consumption of non-durable goods is about twice as large as the consumption of durable goods.

However, since people can defer the purchase of a durable good like an auto from Ford ( F)more easily than they can defer purchase of a box of corn flakes from Kellogg's ( K), durable goods demand is very volatile. As a result, durable goods tend to "punch above their weight" in determining is the economy is booming or slumping.

Durable goods consumption added 0.44 points to growth, down from an addition of 0.49 points in the second quarter and 0.62 points in the first quarter. The downward trend in contributions from durable goods is a bit disconcerting, but is not too bad. The sector is only 10.45% of PCE and 7.36% of overall GDP, yet it contributed 22% of the overall GDP growth in the quarter.

Non-durable goods are 22.4% of PCE and 15.78% of overall GDP. The sectors contribution to growth fell to just 0.20 points in the third quarter from 0.31 points in the second quarter and 0.67 points in the first quarter. I suspect that its growth contribution will rebound a bit in the fourth quarter as demand for non-durable goods tends to be pretty steady and its contribution to growth this quarter was below its overall share of the economy.

Overall, the Consumer is doing his and her part in getting the economy rolling again. Unfortunately as we will see later, too much of that consumption is going to things that are made abroad, and not enough to things made here. The strong contribution from the consumer service sector is encouraging.

I for Investment

Investment tends to be the most volatile part of the economy, and thus is the major reason why the economy either booms or busts, even though it is a relatively small part of the overall economic picture.

Overall Gross Domestic Private Investment (GDPI) is just 12.87% of the overall economy. Overall, GDPI added 1.54 growth points in the third quarter, down from 2.88 points in the second quarter and 3.04 points in the first quarter.

The decline in contribution from GDPI is disconcerting, although the overall level is still OK. However, when one looks a bit deeper, the picture is a bit more disturbing.

The inventory cycle is a powerful driver of booms and busts (recessions from 1946 through the early 1980's were mostly due to the inventory cycle, or at least had the inventory cycle as one of the major components).

The addition to inventories accounted for almost all the overall contribution from GDPI. Inventory investment added 1.44 points to growth up from 0.82 points in the second quarter and a whopping 2.64 points in the first quarter. This is very low quality growth, especially coming on several quarters where it has made a significant positive contribution to growth.

This is the fifth straight quarter where inventories have been adding to growth, but that comes after eight quarters in a row where inventories were a drag on overall growth. The big positive contribution from inventories this time around is both disconcerting and was the major reason that overall GDP growth came in higher than I was looking for. I would look for a much smaller contribution from inventory investment in the fourth quarter, and it would not shock me if it actually proved to be a drag on growth.

Residential vs. Non-Residential Fixed Investment

Fixed investment can be broken down into Residential Investment (mostly homebuilding) and non-residential (or business) investment. Residential investment has been the major thorn in the side of the economy for a long time now, and the third quarter was not an exception (the second quarter was).

In the third quarter, residential investment subtracted 0.80 points from growth. That is a huge swing from the 0.55 point addition it provided in the second quarter and is a bigger drag than the 0.32 headwind it provided in the first quarter. Residential investment is now just 2.22% of the overall economy, down from well over 6% of the economy at the peak of the housing bubble.

The lack of residential investment is one of the key reasons that the recovery so far has been so anemic. Eventually population growth and new household formation will absorb the inventory overhang, and residential investment will pick up. That, however, it not going to happen right away.

Recent data on housing starts and new home sales suggest that we might get a positive contribution from residential investment in the fourth quarter, but if so it will be minor.

Business Investment: Structures vs. E&S

Non-residential, or business investment can also be broken into two major parts, investment in structures, such as new office buildings and strip malls, and investment in equipment and software (E&S). Investment in structures actually added 0.10 points to growth in the third quarter, after being a non-factor in the second quarter (a 0.01 drag to growth) and a 0.53 point drag in the first quarter.

This was a bit better than I expected. Vacancy rates are still extremely high in almost all areas of the country, and in almost all major types of non-residential real estate. We simply don't need to be putting up a lot of new commercial buildings right now. I would expect it to revert to being a small drag on overall economic growth in the fourth quarter.

Investment in E&S is what we really want to see to power future growth, and there the news continues to be good, but not quite as good as earlier in the year. E&S investment added 0.80 points to growth, which is not a bad showing since it is only 7.11% of the overall economy. It is down, however, from a 1.52 point contribution in the second quarter and a 1.24 point contribution in the first quarter.

G for Government

Government spending added 0.71 points to growth in the third quarter, down from a 0.80 point contribution in the second quarter, but up from being a 0.32 point drag in the first quarter.

First, I should point out that in the GDP accounts it is only government consumption and investment that is counted as part of G. Transfer payments, such as Social Security, are not included. They tend to show up as part of PCE when Grandma spends her check.

What is counted is what the government pays in salaries to its employees (both civilian and military) and its spending on goods, from highways to fighter aircraft. All of the positive contribution came from the federal government, which added 0.71 point to growth, down ever-so-slightly from the 0.72 point contribution in the second quarter, but well above the 0.32 point drag in the first quarter.

Overall federal government spending, as defined in the national income statistics, was 8.37% of the economy in the third quarter. Of that, 67.32% was spent on Defense, and 32.68% was on non-defense spending. Defense spending contributed 0.46 points of growth, up from 0.40 points in the second quarter and just 0.02 points in the first quarter. The non-defense contribution was 0.25 points, down from a 0.32 in the second quarter but up from a positive contribution of 0.13 points in the first quarter.

I would point out that non-defense federal spending (excluding transfer payments) is just 2.74% of the overall economy, running at an annual rate of just $403.1 billion. Anyone who suggests that it is possible to cure the budget deficit by only cutting non-defense spending excluding transfer payments like Medicaid and Social Security is someone who quite simply should stay off of Jeff Foxworthy's show, since they clearly are not smarter than a fifth grader.

State and local governments were a 0.03 point drag on the overall economy, down from a 0.08 contribution in the second quarter, but much better than the 0.48 point drag in the first quarter. Frankly, given the severe fiscal problems that most states are facing, and since they cannot borrow legally to cover operating deficits, the 0.03 point drag is a major positive surprise.

A big part of the ARRA has gone to helping state and local governments to avoid having to either cut spending drastically or raise taxes. The ARRA funding is starting to dry up. I would expect that S&L government spending will be a bigger drag in fourth quarter GDP than it was in the third quarter.

(X - M) = Net Exports

The biggest drag by far in the third quarter was net exports, subtracting 2.01 points from growth. In other words, if we had not had a deterioration in the trade deficit in the third quarter, the economy would have grown at a 4.0% rate rather than a 2.0% rate.

That, however, is a substantial improvement over the 3.50 point drag in the second quarter (in other words, we would have grown at a 5.2% rate in the second quarter rather than at 1.7% if the trade deficit were unchanged in the second quarter), but is much worse than the 0.31 point drag in the first quarter.

The problem was all on the import side, as increasing imports subtracted 2.61 points from growth, down from being an incredible 4.58 point drag in the second quarter, but up from the 1.61 point drag in the first quarter.

In the third quarter, increasing exports added 0.61 points to growth, down from an addition of 1.08 points in the second quarter and 1.30 points In the first quarter.

I would expect a bigger positive contribution from exports in the fourth quarter and as we move into 2011, and a smaller drag from exports at the same time.

Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the editor in charge of the market beating Zacks Strategic Investor service.

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