National Economic Outlook - February 2014

Written By:
Ingo Winzer, President

Local Market Monitor

Estimates for GDP in the fourth quarter paint a positive picture, even though total growth was at a modest 2.4 percent annual rate after a 4.1 percent third quarter. Most encouraging is that personal spending was a good part of the growth. Last quarter, personal spending contributed 1.4 percent to GDP growth, this time it was 1.7 percent; this may not seem like a big difference but personal spending is 70 percent of the economy. For the economy to have sustained growth, consumers have to spend; if they keep up the good work in the next few quarters, the economy will shift into a higher gear.

A few other details from the GDP report. Cars were a very small part of personal spending; good, because car buying blocks out other spending. Inventories grew only a modest amount; good, because an economy that just builds stuff for inventory isn't going far. Exports were at the highest level in years (and imports were low - thank you shale oil); good, because it means more jobs in the US. Lower Federal government spending took a full 1 percent off GDP; due to the government shutdown in October?

A not-so-good GDP detail: residential investment was actually negative. This may be the most significant part of the report for the real estate market. The lack of new construction is mirrored in the jobs report for January, which showed a puny 3 percent increase in construction jobs in the past year. On the positive side, this means the economy is growing well even without the construction sector kicking in; on the negative side, there will not be enough new housing to prevent substantial home price increases in many markets in the next few years.

Ever-higher home prices were a short-term boon for the US economy in the mid-2000s, as homeowners spent their bulging equity, but a long-term disaster we're still dealing with. Recent price increases were largely connected with a scramble for foreclosed properties, a phenomenon with a short shelf-life and limited economic impact; a larger, longer bubble in prices because of housing shortages will produce a new recession within the decade.