There has been a boom in total production in the U.S. as the third quarter GDP grew at a 3.9 percent annualized rate. This growth is on top of the 4.6 percent expansion in the second quarter. Such a boom, if it can be sustained, could yield fast job gains and higher wages.
Unfortunately, GDP growth rates have not been consistently high and early data suggest softening conditions in the fourth quarter. U.S. exports will not grow because many important foreign countries are either in recession or are about to fall into one. Fourth quarter GDP looks to rise by only 2 percent. Also way back in the first quarter, GDP had actually contracted by 2.1 percent. Economic growth has not been consistent.
For the year as a whole in 2014, GDP will likely have grown by 2.2 percent: another subpar performance of the less-than-historical-average growth rate of 3 percent. It would mark nine consecutive years of below the historical average growth rate. But in 2015, GDP is forecasted pick up to 2.7 percent.
As to the latest strong third quarter GDP numbers, business spending picked up notably with fixed investment rising at a 6.2 percent clip and exports solidly grew at 4.9 percent. Consumer spending just plodded along unexcitedly with 2.2 percent growth while housing investment of new home construction and broker commissions rose by 2.7 percent. Many government agencies do not like to leave money on the table so they found a way to spend taxpayers’ money before the fiscal year end in September. Federal government spending surged 9.9 percent.
As can be seen in the chart below, GDP growth leads to employment growth. Recently, job growth rate hit 1.9 percent, bringing 2.6 million net new jobs to the economy.
More jobs mean more spending capacity and higher future GDP. Higher GDP in turn means more job creation. The economy is essentially already in this happy virtuous cycle, though a faster spinning of the cycle would be welcomed.
An economy grows best if there is stability through the rule of law. In the 1830s, France did not have that. Red or Black? France had to decide which way to go between a new revolution or the restoration of the monarchy. In a novel reflecting the times, the energetic principal character in The Red and Black faced a choice between joining the military to revive the Napoleonic spirit, or entering into the clergy to restore the Bourbon King Dynasty. Such a back and forth hesitating decision hinders economic growth. That is why neighboring Germany, with faster economic growth, was easily able to win the Prussian-Franco War several years later. It is also a lesson for every country on the importance of the rule of law, rather than a rule by military or rule by church or rule by any one individual.
Lawrence Yun is Chief Economist and Senior Vice President of Research at NAR. He directs research activity for the association and regularly provides commentary on real estate market trends for its 1 million REALTOR® members.