Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20
China Recovered in Q2. Will the Red Dragon Sink Gold? - 23rd Jul 20
UK Covid19 MOT 6 Month Extensions Still Working Late July 2020? - 23rd Jul 20
How Did the Takeaway Apps Stocks Perform During the Lockdown? - 23rd Jul 20
US Stock Market Stalls Near A Double Peak - 23rd Jul 20
Parking at Lands End Car Park Cornwall - UK Holidays 2020 - 23rd Jul 20
Translating the Gold Index Signal into Gold Target - 23rd Jul 20
Weakness in commodity prices suggests a slowing economy - 23rd Jul 20
This Stock Market Stinks - But Not Why You May Think - 22nd Jul 20
Protracted G7 Economic Contraction – or Multiyear Global Depression - 22nd Jul 20
Gold and Oil: Be Aware of the "Spike" - 22nd Jul 20
US Online Casino Demographics: Who Plays Online For Money? - 22nd Jul 20
Machine Intelligence Quantum AI Stocks Mega-Trend Forecast 2020 to 2035! - 21st Jul 20
How to benefit from the big US Infrastructure push - 21st Jul 20
Gold and gold mining stocks are entering a strong seasonal phase - 21st Jul 20
Silver Eyes Key Breakout Levels as Inflation Heats Up - 21st Jul 20
Gold During Coronavirus Recession and Beyond - 21st Jul 20
US Election 2020: ‘A Major Bear Market of Political Decency’ - 21st Jul 20
Summertime Sizzle for Gold and Silver - 21st Jul 20
Overclockers UK Custom Built PC Review - Delivery and Unboxing (3) - 21st Jul 20
Will Coronavirus Vaccines Become a Bridge to Nowhere? - 20th Jul 20
Stock Market Time for Caution?  - 20th Jul 20
ClickTrades Review - The Importance of Dynamic Analysis and Educational Tools in Online Trading - 20th Jul 20
US Housing Market Collapse Second Phase Pending - 20th Jul 20
Capitalising on the AI Mega-trend - 20th Jul 20
Getting Started with Machine Learning - 20th Jul 20
Why Moores Law is NOT Dead! - 20th Jul 20
Help the Economy by Going Outside - 19th Jul 20
Stock Market Fantasy Finance: Follow the Money - 19th Jul 20
Did the Stock Market Bubble Just Pop? - 19th Jul 20
Quick Souring of the S&P 500 Stock Market Mood - 19th Jul 20
The Six-Year Jobs Recession - 19th Jul 20
Silver Demand Exploding! - 18th Jul 20
Tesco Scraps Covid Safe One Way Arrow Supermarket Shopping System - 18th Jul 20
The Rise of Online Pawnbroking - 17th Jul 20
Gold Rallies Together With U.S. Covid-19 Cases - 17th Jul 20
Gold & Silver Measured Moves - 17th Jul 20
The Bizarre Mathematics Of How Negative Interest Rates Create Stratospheric Profits - 17th Jul 20
From a Stocks Bull Market Far, Far Away, Virus Doomsday Scenerio! - 16th Jul 20
Fiscal Cliffs and the Self-destructing Treasury - 16th Jul 20
Dow Stock Market Crash Watch - Update - 16th Jul 20
Gold & Silver Gaining on US Dollar Weakness - 16th Jul 20
How to Find the Best Stocks to Invest In - 16th Jul 20
Overclockers UK Custom Build PC Review - 2. System Build Changes Communications - 16th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

US Economic Growth in Domestic Private Final Demand : Its Falling - Can It Get Up?

Economics / US Economy Aug 08, 2007 - 12:06 AM GMT

By: Paul_L_Kasriel


If the housing recession is not spreading to other parts of the economy, how do you account for the fact that growth in real domestic private final demand is slowing? Real domestic private final demand includes the following line items from the gross domestic product (GDP) accounts: personal consumption expenditures, nonresidential fixed investment expenditures and residential investment expenditures. Real domestic private final demand represented about 87% of real GDP in the past five years. Chart 1 shows the growth in real domestic private final demand in recent years – on both a quarter-to-quarter annualized basis and year-over-year basis.

According to the advance estimate of second quarter 2007 real GDP, real domestic private final demand grew an annualized 1.5% vs. the first quarter 2007 and 1.7% vs. the second quarter 2006. On a year-over-year basis, this is the weakest growth since first quarter 2003. We are not forecasting any re-acceleration in the growth of domestic private final demand in the foreseeable future.

Moreover, we believe it is unlikely that the residual 13% of real GDP – government expenditures, exports and inventories – will grow fast enough to re-accelerate real GDP growth on a sustained basis to anywhere near 2.75%, which is in the neighborhood of potential real GDP growth. Assuming real domestic private final demand were to grow over the next year at 1.7%, its second-quarter year-over-year growth rate, then the sum of the residual elements of GDP would have to grow at 10.3% in order to achieve 2.75% growth in overall real GDP. Only once in the past 25 years – first quarter 1984 – has the sum of these residual components grown on a year-over-year basis equal to or above 10.3%. The 25-year compound annual rate of growth in the sum of these residual components in the past 25 years has been only 3.5%.

Chart 1

As we have discussed elsewhere (see Wealth Effect or Borrowing/Asset Sales Effect? ), households have been engaged in deficit spending since 1999. They have been funding these deficits by borrowing, primarily in the mortgage market, and by selling assets to non-household entities, primarily corporate equities, back to their corporate issuers and to private equity syndicates. With house prices now falling and with mortgage lenders tightening their underwriting standards, the mortgage-borrowing tributary of deficit funding is drying up (see Chart 2). Corporate stock buybacks and private equity buyouts might not flow as rapidly going forward inasmuch as the bond market funding of these activities is getting more expensive, as evidenced by the 136-basis-point increase in high-yield (junk) bond yields from May 25 to August 3 (see Chart 3). With these funding sources of household deficits less abundant, it is no wonder that growth in personal consumption and residential investment expenditures has slowed.

Chart 2

Chart 3

The tentacles of the housing recession are reaching beyond consumer spending. Freight haulers, both truck and rail, are reporting weaker volume growth because of the decline in residential construction activity. With fewer new housing developments popping up in suburbia, newspaper advertising revenues are being adversely affected. And the producers of construction equipment, such as Caterpillar, are experiencing softer domestic sales.

Although exports are likely to be the star performing sector of the U.S. economy in coming quarters, there even is downside risk here, too. First, a lot of the strength in foreign economies in recent years stemmed from America's seemingly insatiable demand for their products. But, as Chart 4 shows, growth in U.S. demand for foreign goods and services has slowed. In fact, on a quarter-to-quarter basis, U.S. imports contracted at a 2.6% annual rate in the second quarter 2007. So, the slowdown in U.S. import demand will negatively affect economies in the rest of the world. Second, foreign central banks are still in a rate-increasing mode. With a lag, these interest rate increases will dampen domestic demand in foreign economies.

Chart 4

The recent flare-up of energy prices has resulted in a re-acceleration in general consumer price indexes. At the same time, a market-based indicator of inflation expectations – the difference between the yield on a regular 10-year Treasury security and the yield on an inflation-protected 10-year security – has actually been signaling lower inflation expectations (see Chart 5). It is noteworthy that the lower market-based inflation expectations are not because the markets expect the Federal Reserve to raise interest rates to combat the current re-acceleration in goods/services price increases. Rather, as also shown in Chart 5, traders in the federal funds futures market are beginning to price in a cut in the funds rate, as evidenced by the rise in the price (which moves inversely with the level of the interest rate) of the November 2007 federal funds contract.

Chart 5

As we stated at the outset, year-over-year growth in real domestic final demand has fallen to 1.7% in the second quarter 2007. As Chart 6 shows, whenever growth in the aggregate has fallen to the current rate, it has never “gotten up” without some help from the Federal Reserve in the form of cuts in the federal funds rate. Indeed, more often than not, even with the help of the Federal Reserve, growth in this aggregate has not gotten up until after the economy had entered a recession (indicated by the shaded areas in Chart 6). Perhaps the Federal Reserve this time will not hear the plaintive cry of real domestic private final demand: “My growth has fallen and it can't get up.” But we think the Federal Reserve will come to the aid of real domestic private final demand at the October 30-31 Federal Open Market Committee meeting by cutting the federal funds rate by 25 basis points. As a point of information, the Commerce Department will release its first estimate of third-quarter real GDP growth. Our current estimate of this growth quarter-to-quarter annualized is only 1.5%, with real domestic private demand growing a touch less at 1.4%.

Chart 6

*Paul Kasriel is the recipient of the 2006 Lawrence R. Klein Award for Blue Chip Forecasting Accuracy

August 2007


Table 1 US GDP, Inflation, and Unemployment Rate

Table 2 Outlook for Interest Rates 

By Paul L. Kasriel
The Northern Trust Company
Economic Research Department - Daily Global Commentary

Copyright © 2007 Paul Kasriel
Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.

Paul L. Kasriel Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules