The press did a good job summarizing the 3.5% jump in third quarter gross domestic product (GDP) -- the big kahuna among the economic indicators. The stronger than expected rise seems to confirm that the recession ended in mid year though there are some looking for a "W" shaped recovery with the risk for another downturn in growth.
As the press noted the bulk of the gain was due to specific stimulative factors. Car sales (and total consumer spending) was strongly boosted by the "cash for clunkers" sales incentive as we already saw the fall off as the incentives ended in September. The incentive for first time home buying also helped to leave a strong rise in residential investment (the first since late 2005) which is likely to soften if Congress allows it to run off as seasonally soft activity arrives in a few months.
The chart above shows the real dollar contributions from the six key components. The forward risk in predominant consumer spending (70% of GDP) comes the broader factors determining the spending force -- unemployment and income growth, credit availability and the strong drop in household wealth.
Business investment has vastly improved over the last two quarters but the accelerating downturn in commercial real estate will continue to be a drag. Residential investment appears to have turned stronger but the cold season ahead will provide regional softening and may extend buyer hesitation with out the buyer incentives. The drag from trade came from double-digit percent gains after over a year of declines from both imports and exports. The weaker dollar will help limit the forward damage here.
Inventories continue to fall but at a slower rate boosting its positive contribution as government spending will remain a very clear positive factor in the year ahead.
My U.S. growth expectations are for modest growth near 2% over the next two quarters as a modestly stronger upward trend arrives in mid-2010 which will trigger the long awaited Fed rate hikes. Given the near zero level of the policy interest rate, expect a more aggressive tightening than seen after the 2001 recession.
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