November 30, 2005
Is It Gangbusters Yet?
James Hamilton's latest post takes a good hard look at incoming economic data, and provides lots of reasons to put on a happy face. And that didn't even include today's revisions to third quarter GDP growth. The short story, from MarketWatch:
The U.S. economy grew at a 4.3% annual rate in the third quarter, the Commerce Department said Wednesday in its first revision of gross domestic product estimates.
It was the fastest growth since the first quarter of 2004. The economy grew at a 3.3% pace in the second quarter and has now grown faster than 3% for 10 straight quarters. The economy has grown 3.7% in the past four quarters. Read the full release.
A month ago, the government agency estimated real (inflation-adjusted) growth in the period July through September at an annualized 3.8%.
The upward revision in GDP was largely due to higher spending on nondurable goods, and to more investments in homes and in business equipment and software.
People were impressed.
"The fact that we added a 10th quarter of above-average growth amidst the hurricane devastation and the highest energy prices ever recorded is awesome," said Ken Mayland, president of ClearView Economics.
"The economy is booming,'' said Mike Englund, chief economist at Action Economics LLC in Boulder, Colorado. Englund correctly forecast third-quarter growth. ``As much as people may have been concerned about gas prices, consumers took the hit and now gas prices are falling.''
"My suggestion would be that people just recognize how well the economy is performing," [Alan Skrainka, chief market strategist with Edward Jones] said.
Were there any discouraging words? Sure. General Glut processes the rising share of consumption, and suggests that the economic house may be built on sand. A related concern shows up in the London Times Online:
Joe Liro, an economist at Stone & McCarthy Research, said: “Third-quarter economic growth was once again supported by strong consumer spending. Unfortunately, the consumer is not in position to provide such support in the fourth quarter, thus we anticipate a sharp slowing of fourth-quarter economic growth.”
And Bizzy Blog catches the New York Times seizing on every opportunity to not join the party:
For every encouraging sign, there is an explanation and concern for the future. Consumer confidence is bouncing back from what were arguably some of its worst readings in years...
Many economists do not expect the party to continue, especially if the Federal Reserve continues taking the punchbowl away and raises interest rates. That could further slow the housing market, damp consumer spending and crimp corporate profits.
But today's news on the inflation front was also pretty darn good. From Reuters:
The report also showed inflation was milder than first thought. A price gauge favored by the Federal Reserve -- personal consumption expenditures excluding food and energy -- rose just 1.2 percent in the July-to-September period, down from the originally reported 1.3 percent pace.
That was the lowest rate of core inflation in more than two years.
Countering that was what was perceived as a less sanguine-sounding report from the Federal Reserve Banks:
The Federal Reserve also raised a small inflation flag in its "beige book" summary of economic conditions, noting that some businesses were able to pass on higher costs for energy, raw materials and transportation to consumers. Upward pressure on wages, however, was modest.
And so the guessing game on monetary policy proceeds. From the Reuters article:
"The Fed can see there are price pressures early in the process, but companies are able to offset that through increased productivity ... and it's just not showing up as higher inflation at the core consumer level," he said.
Thayer said Wednesday's data reinforced expectations that the Fed would raise interest rates in December and possibly in January, taking borrowing costs to 4.5 percent, but could then likely stand pat as inflation pressures receded.
From the MarketWatch article:
"We see little likelihood that the economy will undergo a meaningful slowdown anytime in the foreseeable future without significantly higher interest rates," said David Greenlaw, an economist for Morgan Stanley.
“The report should remove thoughts that the Fed will pause any time soon in its monetary tightening,” said Augustine Faucher, an analyst at Economy.com. “With growth well above the economy’s potential of about 3.5 per cent in the third quarter and conditions pointing to above trend growth in the quarters ahead, the Fed will remain concerned about inflation pressures.”
That's a lot of news for one day.
UPDATE: William Polley endorses VoluntaryXchange's grading curve (and has interesting things to say about putting the latest GDP figure in perspective). James Hamilton digs into the report, and says keep an eye on the shifting fortunes of sectors of the economy that produce internationally tradable goods versus those that do not.
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