GDP Growth – The Good and the Bad

I was just looking at figures released this morning relative to how our economic output is doing.  Gross Domestic Product is a figure that is very important as it shows how we, as a nation, are growing economically by looking at the value of all the goods and services that we generate inside the U.S.  It also has a correlation to our own standard of living.

Today's number showed that the economy expanded in the third quarter by 2.0 percent. The pace improved slightly from the second quarter (+1.7% annualized), but it remained below the first quarter (+3.7%).

Hesitant or not, it’s a relief that national output did increase. The major concern for Washington and the Federal Reserve now is that such a stodgy pace will postpone the much-sought-after improvement in labor markets. There is little need for a meaningful hiring push at this time.

In as much as our growth rate can be suggested as being anemic at best, there were positives within the data contained in the report.  Consumer spending, which accounts for 70% of U.S. GDP, surged ahead 2.6% in the latest quarter, its fastest rate of increase since before the recession began in December 2007.

One conclusion to draw from all these numbers is “keep the faith.” U.S. year over year GDP in 2010’s third quarter was +3.1%. In Canada, industry-based GDP in August was +4.1% versus the year before. These numbers aren’t as bad as some commentators would have us believe.

With such sluggish growth, I am fully expecting that the Federal Reserve will announce another round of quantitative easing (QE2 as it is being referred to).  This is important to the real estate market as it will surely mean that interest rates for mortgages will, for the time being, stay low.

QE essentially means that the Federal Reserve will be turning the presses back on and printing more cash.  In actuality, they don't physically print the money but spend it as if they had!  (This is known in economic circles as creating money “ex-nihilo” or “out of nothing”).

They then proceed to buy up Treasury securities which push down interest rates that include mortgages.  Expect to see rates start to decline in the next few weeks and retest the all time lows that were seen a short while ago.

Ultimately, however, I believe that interest rates have to head higher.  If rates stay at current levels, we are sure to see very high inflation down the road.

by Matthew Gardner