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Third quarter GDP comes in on projection; unlikely to change Fed’s decision next week

posted on October 29, 2010 at 1:48 pm
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he first estimate for third quarter U.S. GDP growth came in right on projections at 2.0%. That was up from the 1.7% growth rate in the second quarter but below the 3% or so growth rate needed to cut significantly into unemployment.

Housing was the big drag on the economy. (Big surprise, right?) Residential investment—home buying to most of us–fell 29% in the quarter. That more than offset a 9.7% gain in nonresidential investment. Nonresidential structures—commercial real estate—grew by 3.9% in the quarter, up from a drop of 0.5% in the second quarter. That’s good news for the still beleaguered commercial real estate market (and the banks with big loan portfolios in the sector.

The bright spot in the numbers belonged to consumer spending which grew by 2.6% in the quarter. That was the strongest quarterly growth rate since the fourth quarter of 2006 and a significant increase from the 2.2% growth rate in the second quarter. The growth rate for consumption of goods (2.8%) and services (2.5%) was about equal for the quarter but that disguises a big increase in the consumption of services from the second quarter when consumption of services grew by just 1.6%.

What conclusions can we draw from today’s numbers?

First, that economic growth remains weak enough so that the Federal Reserve is likely to go ahead with its second round of quantitative easing.

Second, that although growth remains weaker than the country needs to cut into unemployment, the signs of life among consumers are encouraging.

And third, that the combination of weaker than desired growth and signs of improvement in consumer spending are likely to keep the Fed cautious and lead to a very carefully staged month-to-month program of quantitative easing that allows Ben Bernanke and gang to call of the program if the economy starts to pick up speed.

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