Economy Contracting Significantly

From BEA Report:

“PCE declined -3.1% (annualized). This is the first decline in consumer spending since 1991.

Private investment declined -1.9%.

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — decreased at an annual rate of 0.3 percent in the third quarter of 2008 …

The decrease in real GDP in the third quarter primarily reflected negative contributions from personal consumption expenditures (PCE), residential fixed investment, and equipment and software that were largely offset by positive contributions from federal government spending, exports, private inventory investment, nonresidential structures, and state and local government spending. Imports, which are a subtraction in the calculation of GDP, decreased.”

Dr. Janet Yellen, San Francisco Fed President:

“Business spending, too, is feeling the crunch in the form of a higher cost of capital and restricted access to credit. … Some of our business contacts report that bank lines of credit are more difficult to negotiate, and many indicate that they have become cautious in managing liquidity, in committing to capital spending projects that can be deferred, and even in extending credit to customers and other counterparties. Nonresidential construction also is headed lower largely because of the financial crisis; the market for commercial mortgage-backed securities, a mainstay for financing large projects, has all but dried up.

Until recently, weakness in domestic final demand was offset by a major boost from exporting goods and services to our trading partners. Unfortunately, economic growth in the rest of the world has slowed noticeably. … As a result, exports will not provide as much of an impetus to growth as they did earlier in the year.”

For consumers, the credit crunch is one of several negative factors accounting for the decline in spending in recent months. Consumer credit is costlier and harder to get: loan rates are up, loan terms are tougher, and increasing numbers of borrowers are being turned away entirely. This explains, in part, the exceptional weakness we have seen in auto sales. In addition, of course, employment has now declined for nine months in a row, and personal income, in inflation-adjusted terms, is virtually unchanged since April. Furthermore, household wealth is substantially lower as house prices have continued to fall and the stock market has declined sharply.”

Recent data on the economy have been deeply worrisome. Data released this morning reveal that the economy contracted slightly in the third quarter. For the fourth quarter, it appears likely that the economy is contracting significantly. Mainly for this reason, inflationary risks have diminished greatly.

This is pretty bad news. The economy is now officially contracting (although less than expected). I noticed that the market was up close to 3% in light of this news…investors may be missing the point here. I’ve gotten used to reading the phrase: “That was just slightly below (or above) economists’ expectations”, and I’m starting to think that real figures matter much less than “what average opinion believes average opinion to be.”

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~ by eboro on October 30, 2008.

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