Paper Economy: GDP In The Balance

Wednesday, November 29, 2006

GDP In The Balance

Although today’s upward revision to GDP will likely fuel a round of exuberant trading on Wall Street as Bulls attempt to shrug off any pessimism about a slowing economy, a closer look at the Q3 GDP preliminary report shows that “Residential Investment” actually worsened since the advance GDP report published in October.

Third quarter “Residential Investment”, that is, investments in residential housing, declined by the upwardly revised 18% depressing real GDP by 1.16%.

A key “take away” from this report is that the decline to residential housing is persistent.

Many suggested that the second installment of Q3 GDP would revise down the decline to residential investment first presented in October thus lessening its effects on real GDP.

This should present even more evidence that the housing bust is having significant and sustained impact on the economy and will surely continue to depress GDP as the situation worsens.

Also, it’s important to note that investment in “Non-Residential Structures”, that is, commercial real estate, was revised up to show an increase of 16.7% which essentially offset the dramatic decline to residential housing.

It will be interesting to see if commercial real estate can continue this offsetting of the declines in residential real estate or whether the trend is short lived.