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October 28, 2006

Was It Really That Bad?

From the Wall Street Journal (subscription required):

U.S. gross domestic product growth slowed to an annual rate of 1.6% -- the slowest pace in three years -- during the third quarter as the slump in the housing market took its toll on the overall economy. Economists had expected a much larger 2.2% growth rate.

Actually that 2.2% guess was higher than a lot of people were guessing -- Larry Meyer's Macroeconomic Advisers, for example, had been projecting 1.8% and, frankly, 1.6% was better than I was expecting.  One reaction to the report, from the WSJ opinion round up:

[T]his report actually was not as bad as the headline number would have you believe. The major reason for the sharp deceleration in growth was that the housing sector took over one percentage point out of growth. … Basically, you really don't have a weak economy if consumers are consuming, businesses are investing, exports are growing and imports are strong. -- Joel Naroff, Naroff Economic Advisors

That seems about right to me:




There are doubters, of course:

Expect today the usual spin with the soft-landing optimists … This fourth-quarter rebound has, so far, no base or data behind it: residential investment will be falling at a faster rate in the fourth quarter … nonresidential investment that was, until now, growing very fast will sharply decelerate … residential and nonresidential construction will directly affect retail activity where employment has already started to fall. … I thus keep my forecast that fourth-quarter growth will be between 0% and 1% and that the economy will enter into an outright recession by the first quarter of 2007 or, at the latest, second quarter. -- Nuriel Roubini, Roubini Global Economics

Well, OK. But facts are facts, and forecasts are forecasts.  And thus far the facts, so far as we know them, are not showing substantial weakness outside of residential housing.

October 28, 2006 in Data Releases | Permalink


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What is amusing is that this so-called 'horrible' Q3 number still represents faster quarterly growth than Europe has averaged since the gloabl recvoery started in 2002....

As for Robuini, does he seriuously expect a negative contribution from, say, net exports, given that oil has come down $15-$20? And he seems to have overlooked the fact that nonresidential construction added 0.4% to annualized growth last quarter. No doubt when the recession finally comes (2008? 2010?), he'll be the first to say 'I told you so.'

Posted by: Macro Man | October 28, 2006 at 08:50 AM

Is a soft landing really the optimistic scenario.

Recessions are generally self correcting mechanisms that contain the seeds of their own recovery.

But if we see a soft landing what would get growth reaccelerating?
We have had two soft landings, 1967 and 1995. In 1967 guns & butter lead to stronger growth and in 1995 it was the high tech boom.
But what would cause it to happen this time?

Is a soft landing scenario just slipping into a long term stagnation scenario?

Posted by: spencer | October 28, 2006 at 09:27 AM

Great economy if we omit the residential investment sector? Why not eliminate investment in structures and redo the calculation?

Posted by: pgl | October 28, 2006 at 04:42 PM

Less optimistically, you may note this article. GDP data-statistical fluke.


Posted by: Jeremy | October 28, 2006 at 10:02 PM

Well, I don't know. If "Structures" input about 1/8 what "residential investment" does to GDP, if Governnment spending varies widely month-to-month, if consumption makes up about 70% of GDP & housing's bottomed, I don't think I'd be concerned at all.
BUT, I haven't seen ANY evidence that housing's bottomed or that business is investing enough to offset the housing price correction I'm expecting to see.
Unlike BB & J. Lacker, I don't believe the housing price escalation 40% of our population has seen in the last 4+ years(Krugman's r.e. zones) was driven by "FUNDAMENTALS". (I sure wish you'd address this.)
I expect, if the FED stays out of the game, we'll see housing prices revert to their long-term mean growth rate & this will lead to a real drop in "consumption" in Krugman's "zones", & because of their significance to our economy, a recession.
I'm not nearly so apprehensive about a recession as I am of our long-term prospects if the FED intervenes to protect us from what I see as a MUCH-NEEDED price correction.

Posted by: bailey | October 29, 2006 at 06:59 AM

Roubini's response when asked on 10/02/06 by NY Magazine what he sees happening to the housing market:
"since 1997, real home prices have increased by about 90 percent. There is no economic fundamental—real income, migration, interest rates, demographics—that can explain this."

Posted by: bailey | October 29, 2006 at 03:48 PM

Recall that last year at this time we had a rosy 4.9% GDP growth spurred on by a 22.7 increase for autos (contributing 1.3 of that 4.9 figure). We were helped by an even larger auto component this time (25.8) (otherwise GDP would have been only 0.9). The 2005q4 GDP number slipped to 1.8 (in part from a dismal showing, -19, in those autos that were brought forward). So the declining oil prices will counteract the lousy auto numbers due next quarter, but GDP growth could be in negative territory nonetheless.

Posted by: calmo | October 30, 2006 at 01:16 AM

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