The Economy is Stronger!

The Final Reading for 3rd Quarter Gross Domestic Product (GDP) was reported this morning at a 2.6% pace, slightly better than the previous reading but a bit lower than the 2.7% anticipated. Some optimistic "whisper numbers" - or gossip in the trading pits - had called for a reading north of 3%. However, we think, a deeper look into the number does raise concerns, as the gains came mostly from an upward rise in inventories, which offset a downward revision in household purchases. Now think about that - rebuilding inventory just means restocking of shelves, which would be normal ahead of the holiday season, and this particular type of gain has a "shelf life" (ahh…no pun intended, of course). At some point, consumer demand is what is needed to fuel GDP moving higher in a sustainable fashion, and that will in turn help create jobs.
Looking back at last year - for 2010 overall, the economy grew 3.7% in the 1st quarter, 1.7% in the 2nd quarter and 2.6% in the 3rd quarter. In order to create meaningful jobs and put a dent in the unemployment rate, we need to see GDP consistently above 3.5% - and it is likely GDP will be coming in less than that for most of 2011.
It will be interesting to see how the tax cut package and the remaining $450B+ dose of QE2 can help GDP. We expect to see an improved economy - but how much and how soon remains to be seen. Fortunately for the economy, inflation expectations have already ticked higher, as experts believe the Fed will meet their goal of creating inflation. (However, this is not fortunate for Bonds and home loan rates, as we've all been experiencing in recent weeks.) Yet this story isn't over - we need to see how inflation, GDP and jobs fare over the next couple months, which will give us a much better idea of the strength of the economy, and how soon it might be self sustaining, free from government support.
Good news from the housing sector - Existing Home Sales numbers arrived for November at 4.68M, better than expectations, as well as a nice pick up from October's numbers of 4.43M. Additionally, the inventory of unsold homes declined to a 9.5 month supply, a good drop from the prior month's 10.5 month supply. Encouraging news, as it shows that sidelined buyers are starting to dip their toes in the water - and with rates still relatively low, combined with affordable home prices, it remains an incredible time to buy.