The economy barreled ahead in the summer, growing at a 4.9% pace. The performance was the strongest in four years, but isn’t expected to last through the current quarter amid the continuing housing slump and credit crunch, according to The Associated Press.
The Commerce Department’s new reading of the gross domestic product (GDP) from July through September, released today (Nov. 29), was even better than the government’s initial estimate of a brisk 3.9% growth rate for the period. Stronger U.S. exports to overseas buyers and more inventory investment by businesses were the main reasons for the improvement.
The big pickup in GDP, though, didn’t change the picture forming in the current October-to-December quarter. And that scenario is somewhat grim, with indications the economy will lose considerable steam. Growth is expected to slow to a pace of just 1.5% or less in the final three months of this year.
GDP is the value of all goods and services produced within the U.S. and is the best measure of the country’s economic health.
The upgraded GDP figure for the third quarter matched economists’ forecasts. The strong showing suggested that the economy was resilient even as the housing market plunged deeper into turmoil and credit problems intensified. Federal Reserve officials and other economists – looking at fresher barometers of economic activity – have warned that the economy is in for a rough patch.
In another report, the number of new people signing up for jobless benefits last week jumped sharply, suggesting that employment conditions are softening as national economic activity slows. The Labor Department reported that new applications filed for unemployment insurance mushroomed by a seasonally adjusted 23,000 to 352,000. It was the highest level since Feb. 10.
There have been mounting signs in recent weeks that the housing and credit problems are affecting the behavior of consumers and businesses alike.
Spending by consumers and businesses is the lifeblood of the country’s economic activity. The big worry for economists is that consumers and businesses will cut back on spending and investing, dealing a blow to economic growth. The odds of a recession have grown this year. Still, Fed officials and many other economists remain hopeful the country will weather the financial storm without falling into recession.
The Fed has sliced interest rates twice this year – in September and late October – to keep the housing collapse and credit crunch from throwing the economy into a recession. Fed policymakers at the October meeting signaled that further rate reductions may not be needed. Since then, however, financial markets have suffered through another period of turmoil. The housing slump has deepened, consumer confidence has sunk and shoppers are flashing signals of caution.
Against that backdrop, investors and some economists believe the Fed might lower rates when they met on Dec. 11.
Housing Slump
Even with the remarkable GDP showing in the third quarter, the housing situation grew more bleak.
Builders slashed investment in housing projects by 19.7% on an annualized basis. It marked the biggest cut in a year. Credit problems have made it harder for would-be home buyers to finance a home, deepening the housing slump. The inventory of unsold homes continues to pile up and builders continue to cut back. The industry’s problems are expected to drag on well into next year, acting as a weight on national economic activity.
Exports, Spending Grow
Businesses largely carried the economy in the third quarter. Sales of U.S. exports abroad powered growth. Those sales were aided by the falling value of the U.S. dollar, which make U.S. goods cheaper to buy on foreign markets. Exports grew by 18.9%, on an annualized basis, in the third quarter. That was the biggest increase in four years.
Inventory investment by businesses also added to GDP growth as did spending on equipment and software and construction of new plants, office buildings and other commercial construction.
Corporate Profits Slump
The huge losses reported by financial companies due to the mortgage meltdown took their toll on corporate profits. One measure showed that after-tax profits were flat in the third quarter after rising by 5.2% in the second quarter.
Consumer Spending
Consumers were somewhat subdued in the third quarter. Their spending grew at a 2.7% pace, up from a weak 1.4% growth rate in the second quarter but still considered somewhat lukewarm. Analysts expect consumers turned cautious in the current October-to-December period, a factor in forecasts of slower overall economic growth. Post-Thanksgiving retail sales were promising, however.
Inflation in Confort Zone
A separate GDP-related gauge of inflation showed that “core” prices – excluding food and energy – rose at a rate of 1.8%. That was the same as previously estimated but up from a 1.4% rate in the second quarter. Still the inflation figure was within the Fed’s comfort zone.