While extreme uncertainty reigned over most of the third quarter, U.S. Gross Domestic Product (GDP) rose at a satisfactory annual rate of 2.5%, compared to just 1.3% in the second quarter. Growth in "real final sales," which is GDP excluding changes in business inventories, gained a substantial 3.6% in the third quarter versus 1.6% the quarter before.

The fourth quarter started off in good shape as well. Retail sales have registered 16 straight months without a decline, rising 0.5% in October from the month before and more than 7% compared to October, 2010. Job growth was a moderate 80,000 in October, similar to the rate in recent months. The unemployment rate edged down to 9.0%. Rising labor productivity and slow economic growth in the first half of the year have allowed businesses to meet gradual improvement in sales without significant increases in hiring.

While the U.S. economy appears to be doing well, the global situation is decidedly mixed. A recent headline read "China's Economic Growth Slows," but the rate of growth was 9.1% in the third quarter, compared to 9.5% in the second quarter and 9.7% in the first. India's economy remains strong as well.

Elsewhere in Asia, Japan is gradually improving even though it continues to struggle with the aftermath of the tsunami in March. South Korea, Taiwan, Thailand, and Australia have reported weaker economic indicators. Another emerging economy, Brazil, is seeing lower manufacturing output. Its currency has risen sharply, making Brazilian exports more expensive on the world market. Domestic demand in Brazil remains strong.

The biggest headache is Europe. The "eurozone," made up of the 17 countries that use the euro as their currency, finally reached a deal with Greece, its most troubled member. The deal will involve the forgiveness of half of Greek debt in private hands. Greece will continue on its path of fiscal austerity. The country's leader stepped down.

We've been saying that Greece isn't the real threat to the euro because its impact is quite small. The bigger threats are Italy and Spain, countries that are too big to be bailed out. The Greek rescue strategy includes a substantial increase in the size of the European Financial Stability Facility (EFSF). This fund buys debt of troubled European countries in order to hold down their borrowing costs. The EFSF will also be used to provide "insurance" on 20% of the new debt issued by troubled European economies in case of default.

The markets are clearly not impressed. Yields on Italian debt have zoomed to 7% from 5.6% a little over a month ago. Investors clearly believe that there is significant risk of nonpayment from Italy. The Italian debt burden is a lot lower than Greece's, and its current budget deficit amounts to 4% of GDP compared to over 8% in Greece. The problem with Italy is that its economy has barely grown in a decade. Yields have risen on other European debt, besides that of Germany, which is considered the European gold standard.

In contrast to the reasonable rate of U.S. growth, growth averaged was just 0.6% in the eurozone during the third quarter. The Purchasing Managers Index, a measure of industrial activity, pointed to contraction in the eurozone in October.

The improving outlook for the U.S. economy is only partially offset by concern over Europe. As important a market as Europe is for the U.S., China exports more to Europe than does the U.S. However, the likely recession in Europe will impact the growth of American companies that do business there, so we're not totally in the clear. We continue to believe the best investments come from strong companies with dominant products that can win anywhere in the world. We have also consistently favored companies obtaining overseas growth from Asia rather than Europe, as European growth has typically been at the lower end of the global range in recent decades.

Our stock selections are characterized by strong "secular" growth; that is to say, they don't depend on getting much lift from the overall economy. For this reason, we hope that our stocks might continue to stand out in an economy where growth is harder to come by.