Notes from Jim Haughey

Nov 2 2007 12:56PM | Permalink | Email this | Comments (0) |
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By Jim Haughey

GDP grew at a 3.9% pace in the summer quarter but the underlying growth trend through next year remains at 2.5%. While subpar, this is enough to keep nonresidential construction expanding, although at a slower pace and to cushion the drop in home prices which is keeping prospective homebuyers on the sidelines as they wait for the bottom of the price cycle.

It is now clear that the housing collapse will not have a significant negative impact on the balance of construction or the broader economy. The $91 billion drop in new residential investment over the last year has been overwhelmed by the $40 Billion increase in nonresidential investment, the $80 billion improvement in the trade deficit and the $239 Billion increase in consumer spending.

That last quarters’ 3.9% gain was well above the consensus estimate of 3.0% is also significant. This is an attitude changer, especially as it follows the unexpectedly high 3.8% increase in the previous quarter. The pleasant surprise on GDP growth comes on the same day as reports that overall inflation, measured by the GDP implicit price deflator, fell under 1% for the first time in nine years, employment cost increases, including benefits, slipped back to a 2.5% annual growth and October job gains may be well over 100,000 based on an estimate of private hiring by ADP, a payroll processing company.

The favorable economic news will provide a much needed boost to consumer and business confidence which both fell in the aftermath of the July/August turmoil in mortgage and other asset markets. The housing affordability index increased from 106.3 to 114.6 in September. Confidence will now be increasing again so that the improved affordability will translate into additional home purchases by yearend.