Economy Booms Despite Credit Crunch
Kurt Brouwer October 31st, 2007
Now, that is good news. Despite all the problems with subprime lending, the housing slowdown and sharply-higher oil prices, the economy grew at a real (adjusted for inflation) rate of 3.9% for the third quarter of 2007. In this piece, we see some detailed information on how the economy grew despite all the obvious problems [emphasis added]:
GDP Grew 3.9% in Third Quarter On Exports, Consumer Spending (The Wall Street Journal, October 31, 2007, Jeff Bater)
‘The U.S. economy sped up last summer despite a much heavier drag from the housing sector thanks to as surging exports and stronger consumer spending.
Gross domestic product rose at a seasonally adjusted 3.9% annual rate in the third quarter, the Commerce Department said Wednesday in its first estimate of growth for the July-September period. GDP climbed at a 3.8% pace in the second quarter and 0.6% in the first…’
‘…Stronger exports helped power the economy through the housing slump and tighter credit conditions. Wall Street expected a solid but smaller GDP growth rate. The median estimate of 24 economists surveyed by Dow Jones Newswires was 3.2% GDP growth during summer.
The 3.9% increase represented the strongest growth in quarterly GDP since a 4.8% increase during the first quarter of 2006.
GDP acts as a scoreboard for the economy by measuring all goods and services produced. A component, housing, took a big bite out of the economy in the third quarter. Residential fixed investment dropped by 20.1%, reducing overall GDP by 1.05 percentage points. Second-quarter investment had fallen by 11.8%, taking 0.62 percentage point out of GDP. The 20.1% drop was nearly the worst in the current housing slump; investment in third-quarter 2006 plummeted 20.4%. Analysts see home sales receding into next year and bloated supplies of unsold property have left builders discouraged.
Helping drive GDP was its biggest component, consumer spending, which accelerated in the third quarter, rising 3.0% after increasing 1.4% in the second quarter. Purchases of durable goods rose 4.4% in the third quarter, after increasing by 1.7% April through June. Third-quarter non-durables spending rose by 2.7%. Services spending climbed 2.9%. Overall, consumer spending contributed 2.11 percentage points to GDP July through September; it had contributed 1.00 percentage point in the second quarter.
International trade contributed 0.93 percentage point to GDP in the third quarter. U.S. exports surged 16.2% and imports increased 5.2%. In the second quarter, trade added 1.32 percentage points to GDP; exports in that period were 7.5% higher and imports fell by 2.7%.
Third-quarter business spending increased by 7.9%. Investment in structures went 12.3% higher. Equipment and software outlays rose by 5.9%. Overall second-quarter outlays by businesses rose 11.0%…’
Clearly, the slump in housing had a significant impact on GDP growth. The good news is that other aspects of the economy picked up the slack. In particular, consumer spending increased quite a bit. Further improvement was added by international trade and, finally, business spending also improved.
Already, I am seeing dire predictions of a slowdown in the fourth quarter, but we will leave tomorrow’s potential problems to tomorrow. For now, it is enough to be happy that our resilient economy has done very well in taking big blows from the credit crunch, the decline in home prices and the overall slowdown in the housing industry plus the 70% increase we have seen in oil prices this year.
Update: I suspect the 3.9% growth rate will get revised downward fairly soon. This statistic — real GDP growth — represents growth after taking into account inflation for a given time period. In this case, I believe the value used for inflation (less than 1%) was too low. If they used a more reasonable number, the real growth rate would be reduced, perhaps down to 3%. Having said that, I still believe that, for the difficult quarter we just completed, 3% growth is a solid achievement.
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