GDP is down

John Dimsdale Oct 27, 2006


KAI RYSSDAL:Gross Domestic Product, the most comprehensive measure of the nation’s output of goods and services, took a beating between July and September this year. GDP expanded 1.6 percent, a far cry from the robust 5.6 percent growth the economy racked up in the first quarter. Economists attribute most of the third quarter’s worse-than-expected performance to a precipitous drop in the housing market.

Those plucky consumers, though, refused to let falling home values rain on their spending parade. A separate consumer sentiment survey—also out today—showed expectations for the economy are improving. John Dimsdale reports that’s making some economists optimistic about the future. But not everyone.

JOHN DIMSDALE:The third quarter saw the biggest decline in new home investment in 15 and a half years. That, plus slower growth in GDP, is enough to cause some economists, including Robert Scott at the Economic Policy Institute, to predict a 50-50 chance of recession.

ROBERT SCOTT:This is going to reduce consumer wealth and put a limit on their ability to borrow on home equity. We had negative savings again last quarter, so consumers are actually spending more than they’re taking in. That can’t continue forever if they’re unable to take out new loans.

Even though consumer income and spending were strong, there are real signs of worry in those numbers.

But there were other, hopeful signs as well. Business investments in equipment and software grew. Inflation was down a bit. Interest rates hikes should be held at bay.

The positive news prompts economist David Huether at the National Association of Manufacturers to predict better growth by early next year.

DAVID HUETHER:Growth overseas is pretty strong, the dollar is more competitive now than it has been in the past six years. Corporate cash, corporate profits are still relatively high.

At the same time energy prices have moderated a bit and that’s going to be a positive for real growth in workers’ wages, which are gonna support consumer spending going forward.

Today’s report is the last snapshot of economic growth before Election Day and there was a little something for both sides to embrace. Republicans see evidence of future sustainable economic growth, while Democrats warn consumers are facing strong housing headwinds.

In Washington, I’m John Dimsdale for Marketplace.

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