Economy Slows in 3rd Quarter GDP: The Rest of the Story

By October 27, 2006Economy

Business is Up
Today’s Commerce Department advanced report on GDP showed that the economy edged up just 1.6 percent in the 3rd quarter. This is the slowest quarterly pace in three and a half years. Coming on the heels of a 2.6 percent increase in the second quarter.

With the November mid-term elections less than two weeks away, do you think today’s report stimulated any reactions from politicians in Washington? You bet it did.

House Democratic Leader Nancy Pelosi stated, “Today’s report demonstrating that the economy is slowing is more bad news for the millions of middle-income American families.” Similarly, Democratic Senator Jack Reed of Rhode Island said, “This report undercuts the President’s claim that his tax cuts are working.” Wow! Those are some stinging indictments.

Countering this gloomy view, Commerce Secretary Carlos Gutierrez said, “I would not panic about this,” while Treasury Secretary Henry Paulson said the housing boom over the last five years was “clearly unsustainable” and that the housing market “needed to have a correction” by slowing to a more sustainable pace.

Here is my take on today’s report.

Story (1) The slumping Housing Sector

Residential investment declined at a seasonally adjusted annual rate of 17.4 percent in the third quarter. Following a string of three consecutive quarterly declines, residential investment removed 1.12 percentage points from GDP last quarter — the biggest negative contribution to economic growth from housing since the fourth quarter of 1981. Clearly, housing is going through a major correction after 3 years of very strong growth.

Story (2) The Solid Economy Outside of Housing

Outside of residential investment, the status of the economy is more encouraging than some would have you believe. Excluding residential investment, the economy grew by 2.7 percent in the third quarter, nearly identical to the 2.8 percent average pace so far during this recovery.

Consumer spending (increasing 3.1%), business fixed investment (8.6%), and goods exports (10%) all accelerated last quarter. So, with three of the four pillars of the expansion remaining firm, the foundation for continued growth going forward appears to be pretty solid.