Thursday, December 21, 2006

Final 3Q GDP Up 2%

From the BEA:

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.0 percent in the third quarter of 2006, according to final estimates released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 2.6 percent.

The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, equipment and software, nonresidential structures, and state and local government spending that were partly offset by a negative contribution from residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.

The deceleration in real GDP growth in the third quarter primarily reflected an acceleration in imports, a larger decrease in residential fixed investment, and decelerations in PCE for services, in private inventory investment, and in state and local government spending that were partly offset by upturns in equipment and software, in PCE for durable goods, and in federal government spending.

Final sales of computers contributed 0.07 percentage point to the third-quarter growth in real GDP after contributing 0.04 percentage point to the second-quarter growth. Motor vehicle output contributed 0.76 percentage point to the third-quarter growth in real GDP after subtracting 0.31 percentage point from the second-quarter growth.

Let's break these numbers down a bit.

The most glaring number in the report is the decrease in residential investment, which decreased 18.7%. That decrease wiped out gains in a host of other categories. In other words, the housing slowdown is a big drag on economic growth. It took off 1.2 from the total. There's been a fair amount of talk about how business construction will offset residential construction. The problem with this theory is business construction was $426 billion in current dollars while the residential market was $750 billion in current dollars. In other words, business construction is 56.5% of the residential market. This means business construction will have to increase at a really fast rate to take-up the residential building slack. In addition, business construction has increased faster over the last two quarters than in previous quarters. We'll have to wait and see if business maintains its current higher pace of construction, or pulls in the reigns as the economy slows.

Also related to housing, consumer purchases of furniture and other household durable contributed less to GDP growth than previous quarters. More housing problems are bleeding through to the larger economy.

Exports increased 6.8% and imports increased 5.6%. For those of you watching the current account deficit, this is good news. But -- remember that exports lag imports by about $58 billion in the last month. This means that a 1.2% overall increase will take a long time to actually close the import gap.

The bottom line is the economy slowed, and housing was a big drag on growth. Going forward this should raise concerns if the housing numbers continue to point to a slowdown.