The U.S. Bureau of Economic Analysis (BEA) has issued the following news release today:
Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 2.0 percent in the third quarter of 2010, (that is, from the second quarter to the third quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 1.7 percent.
This is exactly what was expected. 2.0% is not gangbusters growth, but it is not a double dip. This is the last big data point the Fed will get before it decides how much quantitative easing it will do. The data suggest that the Fed will go with less QE than more. In the past, Fed Governors had indicated $100 billion per month of easing over six months was the likely size. The Fed will more likely go with less than this.
As far as GDP sub-components go, the increase in spending came in at a relatively robust 2.6% annualized pace, which is higher than the 2.2% pace in Q2 or the 1.9% pace in Q1. Does this suggest the consumer is back, and that spending is accelerating upwards? It is hard to tell because real final sales were not nearly as strong, but at a minimum, this is supportive of sustained recovery. Business spending was also strong.
In terms of net additions and subtractions to growth, inventories added 1.4% to the mix this go round (more than expected, which is why the strength of end demand is still questionable), while consumption added 1.8% and net exports subtracted 2.0%. This demonstrates that the cyclical baton is now being passed from inventories to consumers despite the weak increase in real incomes to date. This certainly makes me less worried about deleveraging as a growth impediment. (Update: having looked at the numbers more closely, I wouldn’t make this statement as emphatically. Clearly the majority of the consumer number is coming from inventories. So, let’s see where this gets us in Q4. See Annaly Capital Management’s take here for another view.) My view is that consumers do need to deleverage and that robust spending in excess of income gains will only create problems down the line. It will be interesting to see how household debt levels track given this data.
This was a good report on the whole and should end any talk of a continuous downturn starting in 2007. The double dip worry should still be with us, however – but not because of the typical cyclical agents of job and income growth or consumer spending as this report demonstrates. It is the housing, mortgage and foreclosure problems more so and deleveraging now less so.
At this stage in the technical recovery, the housing sector problems are the biggest impediment to sustained recovery. And so I see the data as supporting my thesis that the Obama Administration will do everything possible to prevent the foreclosure crisis from interrupting the economic recovery. Ultimately, this means they will take a more bank-friendly tack unless the data, the courts or populist sentiment overwhelms them and forces their hand. But the Obama Administration has shown a desire to do "deeply unpopular, deeply hard to understand" things that benefitted the financial services industry before under the guise of preventing worse economic pain. So I suspect, they will continue in that vein.