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Highlights and Lowlights in the GDP Report

Jeremy Glaser

Jeremy Glaser: For Morningstar.com, I'm Jeremy Glaser. GDP growth clocked in at 2% in the third quarter, driven by a better-than-expected consumer. I'm here with director of economic analysis Bob Johnson to take a deeper look.

Bob, thanks for talking with me today.

Bob Johnson: Great to be here.

Glaser: So anything that surprised you: Was the consumer, that number really great this quarter?

Johnson: I was really pleased with the number. At 2.6% growth for the consumer, which is 70% of GDP, that was a very good number, and that's been trending up for several quarters now, so that number was really good, because you can have growth in exports, you have growth in productivity, and other things happening, but what really drives the economy overall is what are consumers spending, and I think today's number was a very good number.

Glaser: Consumers, we've been worried about them with unemployment so high and wage growth looking like it was stagnating or even moving backward. What do you think got people spending again in the quarter?

Johnson: I think, well, certainly, near the end of the quarter, we had better markets and that may have helped a little bit. People may have felt more confident that they weren't going to be the ones that are going to be laid off. So I think it was probably a little bit of improved confidence on the part of the consumer there that helped them decide to spend a little bit more of their income.

And it's interesting how they have been spending it, too. What's been driving the economy early on was the fact that they were buying goods, and that was the big driver. Even though that's a smaller part of the economy, and less so on services. And this time around, the services growth was a bigger contributor to the GDP growth than goods, and I think that's a very positive sign for the economy going forward.

Glaser: Now that's something I know you've been looking for, for a while. Now that services are doing better, should we just kind of ignore manufacturing, or is it still something that's going to be key to the recovery?

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Johnson: I think manufacturing is always key early on, and it always is, and then as we get further into a recovery, and we're now over a year into it, it begins to fall back a little bit. You don't have the meteoric growth that you have early on. You have growth, but it's just not as much, and I think today's Chicago purchasing managers survey, which was up over 60 and was great in every category, is indicative that manufacturing may be going out of the spotlight, but it's not falling to pieces, either.

Glaser: Now imports were something that actually held GDP back this quarter.

Johnson: Yes.

Glaser: It seems that consumers are buying, but they are not buying things that were made in the United States. Is that a problem for a long-term growth?

Johnson: Well, I think, imports certainly were a problem this quarter. I had hoped for more improvement there. Now there were net exports, which are exports minus imports, took away 3.5% from GDP in the second quarter, and I had thought maybe it would get down to 1% this quarter, but unfortunately it still came in at 2%.

So imports were still a big disappointment. Apparently a lot of what consumers are buying are iPods, flat screen TVs, things that come in from overseas, and exports of things like airliner or whatever weren't maybe as robust as we had all hoped, and so net exports were a disappointment this quarter, the biggest one, that really in the numbers we saw.

Glaser: Turning to another big part of GDP is construction. There seem to be some signs of life in non-residential and commercial construction, but residential still seems to be completely in the basement. Any signs of that changing anytime soon?

Johnson: Well, I think that the commercial will begin a slow ramp back up, and as you pointed out, it was a small help to the economy. I think the residential is such a tiny, tiny part of GDP anymore. I mean, the housing is important in how it's priced, but the new construction of homes is really a tiny part of GDP. So even though the number was off something like 25%, it had very little impact on the GDP calculation, because it is so small.

Now the one thing I will point out as a sense of optimism going ahead: Remember this quarter was when all the expiration of the tax credits really began to kick in. And so that was a huge negative for this sector this time around, and also through some very weird calculations--brokers commissions are a big factor in that number, and we had a lot in the June quarter, when we had the rush before the credits expired. And now in the September quarter, when the housing sales went down significantly, which usually doesn't affect GDP, but it does affect broker commissions. So that was kind of an odd nuance that really hurt, and I think it will still be flat in residential in the fourth quarter. So that will be a help.

Glaser: So looking at this number, it's certainly below the long-term trend. At this growth rate, are we going to be able to get back to closer to full employment or are we still in trouble in terms of jobs?

Johnson: Right now, we're at 2% in terms of GDP growth. As you point out, the normal trend is 2.5% to 3%, and we probably need even a little bit more than that to really make a significant dent in employment. And unfortunately I don't see that. I mean, I see the fourth quarter being better than the third quarter, and the third quarter was better than the second quarter. So I think, we have got a good trend going, and I think we'll continue with that, but that's not enough to really make a huge dent in the employment situation. Until construction comes back, I don't think we really see a lot of hope for that getting a lot better in a hurry.

Glaser: And then looking forward, what are your expectations for the fourth quarter, and into 2011, are there any catalysts on the horizon that you think might drive those numbers?

Johnson: I think, 2.5% growth is a real possibility in the fourth quarter. As you pointed out the residential, which has been kind of negative or flat for long time may actually be a small positive in the fourth. I am still waiting for the net export number to be more of a help than a hindrance, and I think with the dollar being down so substantially especially against the euro in the last couple of months since the end of August, I think that will begin to drive that net export number into a better situation. So that's helpful.

And then I think retailers appear optimistic about fourth quarter sales, holiday sales, and I think that's a good thing, and maybe we'll see another bump up yet in consumption. So if you put those all together, I think, we'll see a little bit better fourth quarter. Private investment spending may be a little dicier, but overall I think we'll have a better number in the fourth than the third. Then we'll look forward to 2.5% to 3% growth in 2011.

Glaser: Bob, as always thanks for your insights.

Johnson: Great to be here.

Glaser: For Morningstar.com, I am Jeremy Glaser.