Recent Economic Performance

Gross Domestic Product and Industrial Production —

Third quarter preliminary GDP increased at an annualized rate of 4.9 percent, up substantially from the second quarter’s revised rate of 3.8 percent. This translates to an increase of 1.2 percent when compared with the previous quarter and an increase of 2.9 percent on the year. This growth occurred despite the continuing woes in the housing sector which has in turn cut demand for housing sector inputs such as lumber and house furnishings. Third quarter industrial production was up a revised 1.1 percent in contrast to preceding quarter when output was up 0.9 percent on the quarter. On the year, industrial production growth was up 1.8 percent after gaining 1.7 percent for the previous quarter.

After real GDP averaged 3.25 percent annual growth in the 1990s, the economy fell into a mild recession in the second and third quarters of 2001. This is despite recent Bureau of Economic Analysis revisions that amended the data and now shows no decline at that time. The events on September 11, 2001 exacerbated the downturn already in progress. GDP recovered in the first quarter of 2002 and the economy has grown in fits and starts since then. A strong housing market combined with low interest rates fueled consumer spending. The economy soared in the second half of 2003 and into 2004 thanks to tax cuts that gave consumers more money to spend. GDP has grown at a more modest pace since then. Now investors are worried that the cumulative affect of the Fed’s interest rate increases has put a lid on growth.

Inflation— The overall October CPI increased by 0.3 percent as it did in September. On the year, the CPI was up a worrisome 3.5 percent. Inflation as measured by the core consumer price index (excluding food and energy) was up 0.2 percent on the month and 2.1 percent on the year. Since the beginning of 2007, the monthly CPI has bounced from a 0.2 percent increase in January and June to a high of 0.7 percent in May. Core increases have been more modest ranging from 0.1 percent increase to 0.3 percent.  

Unemployment — The civilian unemployment rate bottomed out at 3.9 percent in September 2000, a rate not seen since January 1970. But with the onset of recession, unemployment climbed especially in the manufacturing sector. Increases in unemployment were mitigated by the mild nature of the recession. Unemployment is typically a lagging indicator and generally increases even after a recovery is in place. Employment growth continues to be erratic. Unemployment was on a downward trajectory until July 2006, when it climbed to 4.8 percent after two months at 4.6 percent. The unemployment rate remained at 4.5 percent in December but edged up in the first month of 2007. The unemployment rate has ranged narrowly between 4.4 percent and 4.7 percent in the first ten months of 2007.

Merchandise trade — The United States reliance on foreign goods intensified in the 1990s, although export growth improved modestly during the period too. In good economic times, imports help alleviate demand pressures and therefore help curtail price inflation for goods and services. In downturns, a decline in demand for goods also leads to a drop in import demands so that foreign producers feel the effect of a U.S. downturn and the negative impact on domestic producers is mitigated to some extent. Investors overseas have mixed feelings about the U.S. trade deficit. On one hand it means that U.S. consumers continue to buy their exports, which in turn stimulates their domestic economies. However, others worry that the spiraling deficit could lead to a precipitous fall in the value of the dollar.

The trade deficit is viewed as an Achilles heel by traders — especially those in the currency markets who view this deficit along with the fiscal deficit as major U.S. vulnerabilities.