Sep
08

Eye on the Economy: Home Sales Appear to Be Stabilizing

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The Commerce Department’s preliminary estimate of growth in real gross domestic product (GDP) for the second quarter came to a heady 3.3% annual rate, up from the 1.9% “advance” estimate and the strongest pace since the third quarter of last year. The large upward revision primarily reflected much stronger net exports — exports were revised up and imports were revised down — and much less inventory liquidation in the nonfarm business sector.

The housing production component of GDP (residential fixed investment) was revised very little and still shows nearly 16% contraction (annual rate) in the second quarter. That was enough to knock off 0.62 percentage point from overall GDP growth, following much larger negatives in the previous three quarters.

The surprisingly strong GDP report for the second quarter may very well overstate the economy’s true strength and most likely will be revised downward sometime in the future.

For one thing, there’s a major discrepancy between GDP and gross domestic income (GDI), two concepts that are identical in principle, as GDI has shown a much weaker pattern during the past year.

Furthermore, other key data systems, including the monthly employment reports, strongly suggest that the economy was not doing all that well in the second quarter, despite sizable support to consumer spending from the income tax rebates that were enacted into law early this year.

The Economy Is Bound to Weaken in the Second Half

Major sectors of the economy are bound to lose strength in the second half of this year and possibly in the early part of 2009 as well, despite recent declines in global oil prices.

Consumer spending, which accounts for about 70% of GDP, actually started to weaken seriously in July and surely will continue to give way as the support from the income tax rebates first evaporates and then converts to a negative “payback” effect.

ARTICLE SHORTENED DUE TO LENGTH….

LINK TO ARTICLE HERE:

http://www.nbnnews.com/NBN/issues/2008-09-08/Economics+&+Finance/3.html
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