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Thursday, November 29, 2007

Outlook on the Economy

The U.S. Bureau of Economic Analysis today published its latest estimate of third quarter 2007 GDP. Let’s briefly note some of the positives and negatives in the current economy, as well as potential risks looking ahead.


• Real GDP growth was revised upward to a rockin’ 4.9% for the third quarter. With second quarter growth at 3.8%, that’s two solid quarters of economic growth after about a year-and-a-half of under-performing.

• The big positives in the second quarter came in nonresidential private investment and in exports. In fact, real exports were up a staggering 18.9% in the third quarter.

• In addition, real disposable personal income (i.e., after-tax income) rebounded nicely, growing by 4.4% in the third quarter versus -0.8% in the second quarter.

• Inflation as measured by the GDP implicit price deflator was a very tame 0.9%.


• The big glaring negative of course is in housing. Residential investment effectively is in a depression. It has experienced double-digit declines now for six straight quarters.


Looking ahead, private economists, the White House and the Fed all now expect a significant slowdown in the economy over the coming year. The question is: How slow?

Risks for the economy include:

• how far the housing/credit mess spreads;

• the weakening dollar being part of the reason for skyrocketing oil prices (oil is priced in dollars) and stoking inflation worries;

• higher energy costs biting businesses and consumers harder;

• federal government revenue as a share of the economy flirting with danger levels that have always led or been tied to a dramatic slowdown in the economy or outright recession;

• and nothing but questions loom on the policy front regarding possible tax increases and costly regulatory measures (especially on the energy front).

Given the challenges faced in recent times, the U.S. economy has been incredibly resilient. Let’s hope such amazing resilience continues.

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