There is no consistency to be found with the GDP. After a solid showing in the second quarter, the third quarter performance fizzled. The housing sector is one of the few bright spots and consequently is holding up the economy from slipping into a recession.
Specifically, Gross Domestic Product (GDP) grew by only 1.5 percent in the first reading of the third quarter performance. It will get revised as more data trickles in. But assuming this figure is reasonably accurate, it is a disappointing underperformance. At times the economy shows a spark of fast growth like in the prior quarter when GDP grew by 3.9 percent. However, the problem has been inconsistency. Across four straight quarters, GDP has been below the historical average growth of 3 percent for 10 straight years.
The residential real estate’s contribution to the economy grew more solidly, expanding by 6 percent. With much more room to grow for new home construction and home sales, this sector will be the main savior for the economy. Homeowners furthermore have been accumulating equity from rising home values and will therefore have greater confidence to raise consumer spending.
As for other sectors, commercial real estate was mildly negative, implying not enough new construction for office, retail, warehouse, and other commercial buildings. Vacancy rates will surely fall and rents will rise as a result. Overall, business spending remains soft. Federal non-defense spending rose, while defense expenditure fell. Imports and exports both grew by a tad and had little net impact on economic growth.
A hypothetical situation versus reality reveals that the economy is short by $1.7 trillion or by $5,000 per person. The hypothetical is what the economy would be had it grown at just the historical normal rate of 3 percent. This missing $5,000 may be one of the contributing factors behind why some people are fed up with Washington politics and turning to extremes. Donald Trump and Bernie Sanders are likely beneficiaries of this unease and are getting huge turnouts at their political events.
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.