GDP Rises 3.9%, but Slowdown Is Foreseen

The Wall Street Journal (1 November 2007)

The U.S. economy weathered the summer credit crunch surprisingly well as strong export performance offset the drag from housing, but it will be hard-pressed to repeat that growth in coming months.

Gross domestic product, the value of goods and services produced in the country, expanded by a seasonally adjusted 3.9% annual rate in the third quarter, the Commerce Department said. That topped most forecasts and bested second-quarter growth of 3.8% and first-quarter growth of 0.6%.

The crumbling housing sector spurred a 20.1% drop in residential investment, which shaved a full point off GDP growth. That was more than offset by a 3% rise in consumer spending, which contributed two points to GDP growth, and by international trade, which added another point as exports surged faster than imports. The report showed few signs the housing bust was spilling into the rest of the economy, at least in the third quarter.

Economists were quick to note that the U.S. economy was beginning to show signs of weakness in September. Among worrisome details in the third-quarter report was rising inventories, which led some forecasters to predict a cutback in production in the current quarter. Morgan Stanley economists, for instance, cited this as a reason for cutting their fourth-quarter prediction of GDP growth to 1.1%.

Many economists expect growth to slow through the end of this year and into next year as the fallout from a deteriorating housing market, higher oil prices and credit-market woes continue. Consumer confidence in October sank as a result of housing woes and escalating food and fuel prices. Unemployment claims have edged higher, and many retailers have cautioned that holiday sales may be below target.

The latest survey of Chicago regional manufacturing activity dropped to an eight-month low, prompting some economists to question how long foreign demand for exports can prop up the U.S. economy.
Still, many forecasters expect the U.S. to dodge a recession.
"I think that this is a very resilient economy," said Peter Kretzmer, senior economist at Bank of America, "[one] that's likely to ride out what is a very significant disturbance in the housing market."

The latest employment report from payroll company Automatic Data Processing Inc. suggests that the government's monthly jobs report will show an increase of some 125,000 jobs in October, a gain over previous months.
vInflation appears to be contained, with the price index for consumer expenditures rising 1.7% after a 4.3% increase in the second quarter. Core prices rose 1.8%. Additionally, employment costs for wages and benefits decelerated during the quarter.

In remarks following the GDP report, Edward Lazear, chairman of President Bush's Council of Economic Advisers, noted, "It is really quite remarkable that during a quarter when we had housing-market issues, when we had a credit situation in the beginning of August, despite that, we still ended up with nearly 4% growth."

Yet the risks to growth in the current and coming months were palpable enough to prompt the Federal Reserve to cut interest rates yesterday by a quarter of a percentage point, to 4.5%.
"Economic growth was solid in the third quarter," the Fed wrote in a release accompanying the decision. "However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction."