GDP and Housing: Better and Worse

More mixed messages. Today’s release of the revised GDP figures for the third quarter was better than expected, whereas the report on sales of existing homes continued to disappoint. Add in yesterday’s hints that the Fed is in the process of downgrading its views for growth in 2011 and we end up with a decidedly murky view of what’s going on. Evidently we are stuck somewhere in the mire of slow to middling growth with chunks of the economy acting as anchors preventing much acceleration.

First GDP.

GDP grew at an annualized rate of 2.5% in the third quarter. This compares with an original estimate of 2.0%, and 1.7% in the second quarter. The fourth quarter of 2009, and the first quarter of 2010 were 5.0% and 3.7% respectively. So, after fading sharply at the beginning of the year, growth has been restored at a moderate pace. Not enough to cut into unemployment, but enough to fend off any concerns of further contraction.

The key facts to consider in the report is that growth is fairly wide spread. Personal consumption grew at its best pace for several years, with services picking up well and sales of autos particularly strong. Investment is slowing down after the normal early recovery spurt. Residential investment plummeted back tom earth after the false dawn of growth in the second quarter. And government spending was decent, with the notable feature of positive spending at the state level, so the states were not a drag on the Federal level stimulus efforts.

Frankly growth was better than I expected. For the last twelve months we have seen GDP grow by 3.2%, which is steady rather than great coming out of a recession. It is more than I predicted, but still not enough. The early predictions for 2011 are all in the 3.0% range, but rumors abound that the Fed is downscaling its own view: they had been at the more optimistic end of the spectrum. I think the reason for the new caution is the realization that the growth we have, and the growth we are likely to see, is not sufficient to tackle unemployment. There is a growing realization that our problems are more deeply rooted than some analysts originally thought. Personally I put this realization down to the result of a revision in the basic theories used to drive analytical thinking. The re-emergence of Keynes and his followers, especially Minsky, coupled with all the new research on post banking crisis recoveries has dampened even the most ardent neoclassical zealot’s views. I hope this realism persists and informs policy.

Meanwhile unemployment appears intractable to anything other than direct government intervention. Since we are not going to see that, it will last. The latest Fed thinking is that we will have an unemployment rate in excess of 8.0% well into 2013.

Second, Real Estate.

Sales of existing homes took yet another beating, dropping 2.2% in October. They are now down 25.9% year on year. There seems to be no end in sight for the malaise in housing. All the factors playing into the market are working against sellers. The glut of foreclosures hangs heavily on prices; this induces huge uncertainty as to what a good price should be, thus deterring buyers; credit is very tight as banks over react to their own stupidity; and unemployment is making many people fearful of big ticket commitments. None of these are likely to change for a while, and with the fall selling season now behind us a recovery will have to wait until spring. Whether things will change even then is highly disputable. I don’t see anything on the horizon to suggest a radical improvement. The aftermath of the bubble will linger well into late 2011 and early 2012. Only then will we see increases on a regular basis, and they will be from a very low base of activity.

So: even though GDP looks to be in better shape than I predicted, I think the economy is still more lurching along than sprinting. While growth seems well established across the board, nowhere is it truly good. The best characterization is still one of steady, insufficient, and halting growth. GDP will expand in the 2.5% to 3.0% range from here on out. That is not enough. Meanwhile we all have to be concerned about continued disinflation and its impact next year.

Are we out of the woods yet?

No.