Economist's Commentary: October 30, 2008

Quick Take on the Economy: October 30, 2008

By Harika "Anna" Barlett, Senior Research Analyst

The preliminary reading of the real Gross Domestic Product (GDP), announced today, showed a decrease of 0.3 percent from the second to the third quarter, at an annualized rate. This is following an increase of 2.8 percent in the second quarter.
The decrease was primarily due to a sharp reduction in personal consumption expenditures (14.1 percent in durable goods and 6.4 percent in nondurable goods), reductions in residential fixed investment, equipment and software. Positive contributions were from government spending, exports, private inventory investment, and nonresidential structures. A decline in imports, which is expected to continue with falling oil prices, also positively contributed to the GDP.

The weak economy keeps the unemployment claims at high levels. The number of initial jobless claims remained unchanged from the previous week, but the current level at 479,000 is well above the benchmark of 400,000, indicating a frail labor market. The four-week moving average was 475,500, decreased by 5,000 from the previous week's revised number.
The Labor Department announced that the advance figure for seasonally adjusted continuing unemployment claims was 3.715 million, with a slight decline of 12,000 from the preceding week.

The decline in GDP and high unemployment numbers confirm the economy is in a mild recession. When both consumers and businesses reduce spending, as it is the case, strengthening the housing sector can provide the needed stimulation to the economy, to which the government is turning its efforts.
Among various plans currently discussed, a temporary reduction of mortgage interest rates to help out a significant number of those homeowners, who have solid incomes to be able to make reasonable mortgage payments, but are threatened by foreclosure under their existing payment schedules, can stop further foreclosures. An additional incentive through lowered mortgage interest rates can bring many potential buyers to the market, helping reduce high inventories, and revitalizing residential construction, as well as durable goods sector. Lower mortgage payments will also allow homeowners to channel some of their incomes back to spending, which is the largest component of the economy, and will help businesses.
The housing sector has the power to take the economy out of a recession, and a speedy solution to lowering foreclosure rates and improving home buyer confidence will prevent a deep recession.

This is one in a series of commentaries by the Research staff of the National Association of REALTORS®. Read more commentaries >

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