New GDP Data & Are We at a Turning Point?

The U.S. Bureau of Economic Analysis (BEA) released their first estimate of the fourth quarter 2013 Gross Domestic Product today. The estimate indicates that the economy grew 3.2 percent in 4th quarter. This followed a 4.1 percent growth rate in quarter 3 which followed a 2.5 percent growth rate in quarter 2. The growth in the latter three-quarters of 2013 was the best three-quarter performance on record, since a period ending March 2006.

The fourth quarter was driven most significantly by personal consumption and export growth, at 3.3 and 11.4 percent respectively. Nonresidential fixed investment and inventory investment provided more modest sources of growth.

With strong consumption growth we might suspect that the personal savings rate fell, and it did, from 4.9 percent in the third quarter to 4.3 percent in the fourth quarter. Given that household debt levels are still relatively high, rapid consumption expenditures, while a boost to current economic growth, might not be the best recipe for the future health of the economy.

Residential investment expenditures fell 9.8 percent, the first contraction in three years. A relevant question in this case is if this contraction is a one-time thing or if it is a turning point in housing construction? Recent existing house demand has been driven in part by investors. At some point, probably within the year, this demand source will subside. The investment companies are renting the homes that they bought. At some point, that stock of homes might be converted back to ownership, which would supply the housing market. It could be that not much new housing construction is needed.

It does not appear like housing markets are back to normal still, even though it has been almost eight years since the national U.S. home price began its decline in the third quarter of 2006. Housing is important to economic activity. Why? A house has a large “multiplier”, and real estate is where the bulk of many families’ stock of wealth is stored. This one large asset is an important consideration to many household decisions to consume, save, and invest.

Coming back to the overall economy, the fairly strong growth report for quarter 4 is encouraging, particularly given the weak December jobs report. However, I am not convinced it is sustainable in future quarters, and I am still not quite ready to believe the economy has reached a point of historically normal post-recession growth.

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