Signs of Life May Restrain Fed

11/01/2010 10:40 am EST


Jim Jubak

Founder and Editor,

The first estimate for third-quarter US (gross domestic product) growth came in right on projections at 2%. 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 non-residential investment. Non-residential 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, but that disguises a big increase in the consumption of services from the second quarter, when it grew by just 1.6%.

What conclusions can we draw from today’s numbers?

First, economic growth remains weak enough so that the Federal Reserve is likely to go ahead with its second round of quantitative easing. (To get a fuller idea of how the Fed sees the US economy right now, see my post on the recent durables orders report.)

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

And third, the combination of weaker-than-desired growth and signs of improvement in consumer spending is 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 off the program if the economy starts to pick up speed.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this post. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund’s portfolio here.)

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