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GDP Surged in Summer But Slowdown Is Coming

CNBC.com With Reuters
Thursday, 29 Nov 2007 | 12:27 PM ET

A surge in inventory-building and robust exports propelled U.S. economic growth ahead at the fastest rate in four years during the third quarter, but a jump in claims for jobless benefits last week underscored the sharp slowdown now under way.

The Commerce Department reported that gross domestic product that measures total production within U.S. borders climbed at a revised 4.9 percent annual rate instead of 3.9 percent reported a month ago.

It was the strongest quarterly growth rate since the third quarter of 2003 when GDP surged at a 7.5 percent rate and slightly exceeded Wall Street economists' forecast for a 4.8 percent rate of increase.

The department revises its GDP figure twice after its initial estimate and will publish its final figure for third-quarter performance on Dec. 20. Third-quarter GDP is now regarded as old information by Wall Street participants, who focused on the surge in jobless aid claims.

"Unfortunately, much of what happened in the summer is going to be old news to the financial markets," Mesirow Financial's chief economist Diane Zwonk told CNBC.

GDP & Jobless Claims
Breaking down the GDP report and weekly jobless claims, with Jim Iuorio, TJM Institutional Services; Diane Swonk, Mesirow Financial; CNBC's Steve Liesman & Rick Santelli

A slumping housing sector and waning consumer confidence already is predicted to sap fourth-quarter growth and analysts say that risks are rising for a recession next year.

The Labor Department said new claims for unemployment aid jumped by 23,000 last week to the highest since February, though that figure might have been affected by the fact that last Thursday was the U.S. Thanksgiving Day holiday.

"It looks like it could be lights out for the economy," said economist Chris Rupkey of Bank of Tokyo-Mitsubishi UFJ in New York, referring to the rise in claims. "This is exactly what it looks like when we are going into recession."

Economist Steven Wieting of Citigroup said that after showing surprising resilience through 2-1/2 years of housing declines, the economy now faced pressure from tightening credit conditions. As a a result, "We...think growth in the fourth quarter will be below 1 percent," he added.

The Federal Reserve said Wednesday, in its latest Beige Book survey of national economic conditions, that growth had slowed in October and the first half of November, largely because of an "ongoing slowdown" in the housing sector.

The GDP report showed companies built up inventories twice as fast during the third quarter as the government had estimated a month ago - at a $32.9-billion annual rate instead of $15.7 billion.

Higher inventories add to growth and likely reflect stockpiling ahead of the Thanksgiving-to-Christmas holiday sales season but they can be a drag on future performance if sales do not meet expectations.

A cheaper U.S. dollar appeared to be paying off in the form of a stronger trade performance. U.S. exports climbed at an 18.9 percent annual rate instead of 16.2 percent. It was the strongest growth in exports since the final quarter of 2003 and more than double the second quarter's 7.5 percent rate.

Imports were up at a revised 4.3 percent annual rate instead of 5.2 percent, following a 2.7 percent rate of contraction in the second quarter.

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