Thursday, September 27, 2007

Economy Shows Growth, But Misses Forecasts

Revised GDP reading shows that economy expanded at 3.8% pace, but credit crunch impact looms.
The Commerce Department reported Thursday that the economy grew at a 3.8 percent annual rate in the April-to-June quarter, the strongest showing in just over a year. Although the new reading for the second quarter was slightly less robust than a previous estimate of a 4 percent growth rate, it nonetheless marked a substantial improvement over the feeble 0.6 percent growth rate registered in the prior quarter.

The increase in the rate of growth, though, is likely to be fleeting. A deepening housing slump and a painful credit crunch since the spring has darkened the mood of individuals and businesses alike. That has led analysts to predict that economic growth has slowed considerably in the quarter that ends Sunday.

The National Association for Business Economics says it believes growth in the third quarter - the period from July through September - slowed to a pace of around 2.4 percent. It predicts the growth rate in the final three months of this year will be around 2.5 percent. Others think growth will turn out to be weaker than those projections.
The fourth quarter actual growth numbers could turn out to be very disappointing as the credit crunch and the housing market decline will make its way into all areas of the economy. I believe that all industries associated with the housing market will show recession like numbers and that this will continue well into 2008.

Our economy has been operating on a borrow now pay later strategy for years as Americans borrowed on their home values to keep up a lifestyle that their incomes really could not afford. It appears the time to pay the piper may finally be here for both the American citizen and the American government. The pain may be a lot worse than people expect. Our dollar is declining daily while our deficit grows and the Federal Reserve keeps interest rates artificially low to ward off recession. Our manufacturing base is gone and even a declining dollar has not done much to correct our trade imbalance because we simply do not manufacture much here anymore.

The American middle class which was once the envy of the world is in quick decline. Are you really middle class if you need to constantly borrow to afford a middle class lifestyle? The answer to that question is obviously no but we continue to operate under the false illusion that it is true.

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