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Real GDP grew at a solid 3.5 percent annual rate in Q3, slightly better than the consensus expected. In particular, home building increased at a 23.3 percent annual rate, the fastest increase since the 1980s. Home building bottomed in the second quarter and we can anticipate a significant upward trend over the next few years. It will take a few years for home building to return to normal, so even during the recovery the housing market can work off excess inventories.

If anything, this first estimate for Q3 will be revised upward toward 4 percent in the next two months. When the government makes its first estimate for GDP, it has to make assumptions about trade, inventories, and construction late in the quarter. This time around, it assumed a large increase in the trade deficit in September. An increase that size is unlikely, given the end of cash for clunkers in August, which should have put downward pressure on imports in September. Although much of the increase in Q3 real GDP was related to autos, this does not mean it was caused by cash-for-clunkers. The auto sector’s contribution to real GDP ultimately depends on production, not consumption. Auto companies scheduled Q3 production increases early this year, before the clunkers law was passed, because production had previously dropped to unsustainable lows. Now, with auto inventories relatively lean and sales likely to increase in the year ahead, auto production will continue to make gains.

In other news this morning, new claims for unemployment insurance declined 1,000 last week to 530,000. The four-week moving average fell to a new recovery low of 526,000. Continuing claims for regular state benefits fell 148,000 to 5.80 million.

— Bob Stein is senior economist with First Trust Advisers.



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