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Economy Receives a Slight Boost—Or Does It?

ups-and-downs-graph1-300x198The U.S. economic picture has been mixed as of late, as job gains were back up in February but the growth in financial markets such as stocks, U.S. dollar, and oil prices, has not been enough to offset the flatness in economic growth.

The economy received a slight boost Friday when the Bureau of Economic Analysis (BEA) announced that the gross domestic product (GDP) grew at an annual rate of 1.4 percent in its third and final estimate for Q4—an increase from 0.7 percent in the first Q4 estimate released in January and 1.0 percent in the second Q4 estimate released in February.

“Final fourth quarter GDP numbers showed slight improvement over earlier estimates but represented a disappointment as a close to the year,” Fannie Mae chief economist Doug Duncan said. “The 2 percent growth rate fourth quarter over fourth quarter for 2015 correlates with the majority view in our National Housing Survey that the economy is on the wrong track even though this current expansion is now the fourth longest since World War II.”

He continued, “The upward revision in consumer spending's contribution to growth is consistent with our expectations that consumers will provide sufficient support to keep the economy from backsliding. However, that will be insufficient to push the economy forward beyond the 2 percent rate of growth as the decline in corporate profit, the drag of the strong dollar, and the manufacturing slowdown all suggest 2016 will be more of the same for growth.”

GDP growth, even with the slight upward revision for the third Q4 estimate, was still down by a full percentage point over-the-year (2.4 percent for Q4 2014).

GDP“The slowdown in growth over the year reflects drags from slowing PCE (personal consumption expenditures) growth, inventory adjustments following an earlier surge, declines in the energy sector based on collapsing oil prices, and to a lesser extent a strong dollar weakening exports,” said National Association of Home Builders (NAHB) Assistant VP for Forecasting and Analysis Robert Denk. “Upward revisions to PCE growth, a winding down of energy sector declines, more sustainable inventory investment, and a modest weakening of the US dollar so far in 2016, potentially spurring exports, combine to point to accelerating GDP growth going forward.”

Even with the increase in GDP production for Q4’s final estimate, housing’s share of the GDP effectively remained unchanged at 15.30 percent, according to the NAHB. The NAHB reported, however, that the building and remodeling component of housing, residential fixed investment (RFI) had expanded for the fifth straight quarter up to 3.32 percent of the total GDP.

RFI, which is the measure of how homebuilding, multifamily development, and remodeling contributes to the GDP, during Q4 2015 was at its highest level since the first quarter of 2008. According to NAHB, RFI’s 3.32 percent share of the economy amounted to seasonally adjusted annual pace of $547 billion, which was an improvement of 2.42 percent over the third quarter. RFI contributed 0.33 points to the growth of the GDP during Q4, meaning that without RFI, the GDP would have increased by 1.07 percent without RFI. Historically, RFI averages about 5 percent of GDP.

The other housing component that impacts GDP, housing services (which includes gross rents and utilities paid by renters, estimates of the cost to rent owner-occupied units, and utility payments, represented 11.98 percent of the economy, which calculated to a seasonally-adjusted annual rate of $1.97 trillion. Historically, housing services have averaged 12 to 13 percent of the economy.

Earlier in March, the Federal Reserve deemed economic growth insufficient enough for a rate hike. In Fannie Mae’s March 2016 Economic and Housing Outlook, Duncan stated that “We see lingering effects of the strong dollar, low oil prices, and soft overseas demand creating a drag on economic growth. However, the economy appears to have regained some footing after a slowdown in the fourth quarter of 2015, as stocks bounced back and oil prices have risen amid a strengthening labor market. Current labor market and inflation conditions continue to support our expectation of a fed funds rate hike of 25 basis points each in June and December.”

About Author: Brian Honea

Brian Honea's writing and editing career spans nearly two decades across many forms of media. He served as sports editor for two suburban newspaper chains in the DFW area and has freelanced for such publications as the Yahoo! Contributor Network, Dallas Home Improvement magazine, and the Dallas Morning News. He has written four non-fiction sports books, the latest of which, The Life of Coach Chuck Curtis, was published by the TCU Press in December 2014. A lifelong Texan, Brian received his master's degree from Amberton University in Garland.

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