GDP growth surged 3.9 percent, but surge will be brief

I'm reading two stories that I think really show the state of the U.S. economy and where it is heading. I'm going to start with this first story from the New York Times, titled Surge Will Be Brief, Economists Say:

The economy expanded faster than expected in the third quarter, led by a surge in consumer spending and export sales, the government reported yesterday. But economists said the good news would not last.

Rising oil prices, an ailing housing market and the weakening dollar all point to a slowdown in growth, analysts said.

“There is a growing wariness and a growing anxiety among consumers about the outlook for energy prices, for job stability, for the ongoing erosion in the value of their most important asset: their house,” said Bernard Baumohl, managing director of the Economic Outlook Group. He said the third-quarter increase “may well be the strongest quarterly growth for the next year.”

[....]

Third-quarter gross domestic product came in ahead of estimates, growing at a 3.9 percent annual rate, the fastest since the early months of 2006. That compares with 3.8 percent in the second quarter and 0.6 percent in the first quarter.

Graph showing U.S. third-quarter GDP growth surging to 3.9 percent. From New York Times.

The NY Times reports that consumer spending rose 3 percent after a 1.4 percent gain in the second quarter. Sales surged on big ticket items like appliances and furniture. Export sales more than doubled to an annual growth rate of 16.2 percent. Housing activity fell 20.1 percent, making it a seventh consecutive quarter that housing dropped. According to Baumohl, "There is no light at the end of the tunnel."

So what is this NY Times story saying? Third-quarter GDP growth grew 3.9 percent from a combination of strong consumer spending and export growth, even though housing continued to fall. And let us also remember that auto sales dropped for Chrysler and Ford for October. Even during the summer of 2007, U.S. auto sales dropped. So consumers may be spending, as per this 3 percent spending increase, but what are they really spending their money on? Because they are not spending their money on cars, which is a big-ticket item.

Now I want to get into this second story from Reuters, titled Export, consumer-led economic growth to fade:

WASHINGTON (Reuters) - The economy grew at a healthy clip in the third quarter despite a heavy weight from housing, but the strong consumer spending and export performance that held it aloft now look set to fade.

Economists expect that over the next few quarters the economy will grow at a pace less than half the surprisingly strong 3.9 percent annual rate in the July-September quarter.

"The economy grew solidly in the spring and the summer but that strong spell may be history," said Joel Naroff, president of Naroff Economic Advisors in Holland, Pennsylvania.

Now both stories lead off with the same thing--third quarter GDP growth surged by 3.9 percent, but the surge will be brief. Both the NY Times and Reuters stories also report that the U.S. manufacturing sector may be weakening. According to the Reuters story, a report from the Institute for Supply management "showed factory activity practically came to a halt in October, a sign tighter credit conditions and the housing downturn are now taking a toll on a broader swath of the economy." The New York Times reports that according to the Chicago arm of the National Association of Purchasing Management, business activity in the Chicago area dropped to an index of 49.7 in October, from 54.2 in September. This is considered a bellwether for economists as the index drop shows increasing costs to business that are also receiving fewer orders. An index number dropping below 50 indicates a business contraction. So both stories show a manufacturing sector that is weakening. But Reuters also reports this interesting detail:

Many forecasters expect the economy to grow only in the 1 percent range in the fourth quarter, and well under 2 percent during the first half of next year.

Much of the strength in the economy during third quarter reflected a surge in exports -- the largest since the last quarter of 2003 -- as the foreign appetite for U.S. goods jumped against the backdrop of a weaker dollar.

But still, net exports contributed less to the gain in third-quarter GDP than they had in the prior quarter, and their positive impact will likely continue to diminish as the health of the global economy deteriorates.

"I don't think the kind of 14 to 15 percent growth in exports is maintainable," said Naroff.

The U.S. economy grew in the third quarter because of exports. Foreigners were buying up U.S. goods because the falling U.S. dollar made those goods cheap. But the Reuters story is also reporting that net exports contributed less to the gain in the third-quarter GDP than they had in the second-quarter GDP. The value of those net exports in propping up the U.S. GDP is dropping. According to Reuters, the latest International Monetary Fund is forecasting a slowing growth rate in the European economy to 2.1 percent next year from an expected 2.5 percent. The European economy accounts for around a 30 percent demand for U.S. exports. If the European economy starts to slow down, then the Europeans are going to cut back on purchasing U.S. goods. If this turns out to be true, then the U.S. economy will need to be propped up by the U.S. consumer. And the U.S. consumer is going to be tapped with both increasing mortgage payments due to changing adjustable-rate mortgage rates, increasing energy costs, and perhaps even increasing food costs. I don't think that the American consumer can keep the U.S. economy out of a recession, not with the serious housing and energy problems in this country. And if the U.S. does enter a recession, we may not know about it until mid-to-late 2008--well into the presidential election.