Housing Decline Slows the Economy
The bursting housing bubble slowed economic growth in the third quarter to 1.6 percent, its slowest rate of expansion since the first quarter of 2003, according to a preliminary estimate by the Commerce Department. Economists were expecting growth of around 2.1 percent, down from 2.6 percent in the second quarter. There's no doubt that another huge drop-off in residential real-estate investment was again a prime culprit in the economy's sharp slowdown. Residential construction tumbled a whopping 17.4 percent, compared with a decrease of 11.1 percent in the second quarter. "The housing market did a real number on economic growth in the summer," says economist Joel Naroff of Naroff Economic Advisors.
Trade was another negative factor. The lagging impact of high oil prices caused imports of goods and services to increase 7.8 percent, compared with 1.4 percent in the second quarter. Money sent abroad is dough not spent on domestic goods and services. But although growth has now slowed sharply from a brisk 5.6 percent pace in the first quarter of the year, don't look for recession fears to start panicking Wall Street. "You're not going to get a dramatic reaction to these numbers," says James Paulsen, chief investment strategist for Wells Capital Management. "They knew it would be bad."
Once you start digging through the numbers, you realize that there were plenty of positives to hint that the housing downturn isn't hemorrhaging into the rest of the economy. Examples: a 3.1 percent increase in consumer spending (vs. 2.6 percent in the second quarter) and a 6.6 percent increase in business investment (vs. a 1.4 percent drop in the second). Also, real disposal personal income increased at a healthy 3.7 percent.
So if you factor out housing and trade, gross domestic product grew 3.5 percent, according to Paulsen's analysis. But is it fair to do that? Probably. Oil prices are way down and "housing is not going to drop by 17 percent again next quarter," predicts economist Robert Brusca of FAO Economics. Indeed, analysts point to rising mortgage applications, increasing timber prices, and some stronger housing sales numbers as indicating the worst may be over for housing. Many economists now expect the economy to pick up speed in the fourth quarter, perhaps to as high as 3.5 percent, causing the Fed to raise rates again.
For now at least, the Federal Reserve is probably pleased by what it sees. Not only did growth slow, but the GDP's price deflator increased just 1.8 percent in the third quarter, compared with 3.3 percent in the second. "The Fed got the moderation in growth that it was expecting and hoping for, and it is now very likely that the [Federal Open Market Committee] will remain on hold at the December 12 meeting," Bear Stearns economists concluded in a morning research note. After that? On the bearish side, Global Insight economist Nigel Gault thinks housing weakness will continue to cause subpar growth–below 3 percent–paving the way for the Federal Reserve to lower interest rates.