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.
7 comments:
So... do Bernanke and the Fed really have any good tools at their disposal for dealing with something of this magnitude? What more can monkeying with interest rates and issuing bonds really do at this point?
Isn't this something that's going to have to be solved w/ radical changes in domestic and foreign policy?
You're going to say "both" (good lawyering!), aren't you?... =| lol
/Fed to slow the fall; policy to change the course?
Not really. The Fed's main policy tool is interest rates. This is a good tool but it is limited.
For example, suppose the dollar continues to slide. Can the Fed lower rates at that point? Maybe not.
Note that the interest rate as a policy tool is far stronger with respect to putting on the brakes than putting on the gas.
That is a straightforward observation. On the one hand, there is some interest rate that will throttle off consumer and business debt-financed spending. On the other hand, as Japan saw in the 1990's even an overnight rate of 0.1% is not necessarily low enough to encourage people to borrow when the economy is sluggish.
Government spending is more effective as a stimulus, provided the bulk of that spending is directed to the domestic economy ... as was automatic back in the 1960's and 1970's, when imports were under 3% of GDP. However, the more open the economy, the more power external finance constraints have to undercut the effectiveness of government spending.
In the face of a current account blow-out and on the brink of an economic downturn ... and 2% growth per year is coming close to the growth rate required to simply maintain stable employment ... the primary remaining policy tool to fight recession is to restructure government spending so that money presently spent overseas is spent domestically.
Of course, that economic policy runs into a direct conflict with the occupation of Iraq. In the broader picture it conflicts with the long running foreign policy of expanding the network of 700+ overseas military bases whenever an opportunity presents itself, where the occupation of Iraq is a part of that policy that has slipped out of control and into public view.
What would the GDP be if the US wasn't running massive trade and budget deficits?
Exactly...
What would the GDP be if the US wasn't running such massive trade deficits? It depends on whether that is from expanding exports or contracting imports. If it was all from increase exports, the GDP would go up by more than the increase in exports.
What would the GDP be if the US did not have such a massive budget deficit? It depends on where the shortfall is made up ... if its from spending overseas, there would be little reduction in US GDP, if it was all from domestic spending, US GDP would fall by more than the reduction in spending.
And if anyone offers you exact projections for questions like that, they are selling snake oil. With those kind of counterfactuals, you have a choice between approximately true, approximately false, and precisely false. Precisely true is not one of the available options.
brucemcf doesn't believe in Keynesianism, while the Bush admin, the Dems, and the Fed all do. What's wrong with this picture?
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