United States GDP

Dan, my favorite workaholic, sent the following from China and asked that I post it:

Dan Hamilton
October 28, 2010

The first estimate of United States third quarter Gross Domestic Product came out today. The preliminary estimate of third quarter real GDP growth was 2.0 percent, which follows a 1.7 percent growth rate during the third quarter. This preliminary estimate of third quarter economic growth is not very different from the previous quarter’s growth rate. However, one aspect of the composition of growth changed dramatically from the previous quarter, which was residential real estate investment. This measure, which grew 26 percent during second quarter, fell 29 percent during the third quarter.

I have argued in this blog-space that the 26 percent second quarter growth was a temporary, stimulus driven result, and not a sustainable recovery in residential real estate. This data release supports that argument and is congruent with our September 27 United States Economic Forecast of a contraction in this investment segment.

I should say that with respect to the recently ended recession and the currently weak recovery that we are now experiencing, “it’s the residential real estate, stupid!”, and we see continued weakness for that sector for some time. There are too many homes yet to be foreclosed on and too many unemployed that cannot consider a home purchase at this time. The stock of ownership housing is too large for demand, and it will remain too large for demand this same time next year.
Other aspects of the data release are counter to my forecast, namely stronger consumption expenditures, stronger inventory investment, stronger government expenditures, and stronger commercial real estate expenditures. Stronger consumption expenditures boost GDP now, but given that household sector debt levels are still too high, I worry about the long-term consequences of such consumption. Continued consumption growth, if it occurs, will be accompanied by rapid inventory investment.

I continue to be surprised by the strength of government expenditures. The preliminary estimates show federal spending growing with such strength to offset state and local weakness. I continue to expect that state and local expenditure weakness will be a greater drag on growth during the next few quarters than the previous couple of quarters.

Third quarter GDP was reduced by trade as was the case in second quarter, although this effect was weaker this time, 200 basis points, versus 350 basis points during third quarter. These results are driven by extraordinary import strength, which most forecasters, as well as I, do not believe is sustainable. Once this import strength subsides, GDP growth will benefit.

I do not see many fundamental support factors for United States economic growth at this time other than trade, technology, and manufacturing. However, these are not large enough to create a strong economic recovery from the Great Recession. The next couple of quarters might see offsetting factors that create moderate growth for some time to come. The positive factors will likely be: federal government expenditures, equipment and software investment, and import growth reductions. The negative factors will likely be: state and local government expenditures and real estate.

A major difficulty with forecasting at this time is the question of how households will behave during the next couple of quarters. Will they save for the future or consume? There are economists on both sides of this question. We have been thinking that they would save, and we will probably continue to forecast this.

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