Gross domestic product, the broadest measure of goods and services produced in the U.S., grew at an annualized rate of 2.5 percent in the third quarter, allaying fears of an imminent recession. Investment in business equipment and software surged ahead at a 17.4 percent clip followed closely by non-residential structures at 13.3 percent. Personal consumption expenditures, which accounts for 70 percent of GDP, grew by 2.4 percent, its best showing since the fourth quarter of last year. If consumers stay in the game, the economy should be okay. Growth is still not strong enough to bring down the 9.1 percent unemployment rate; GDP of 3 percent or better is needed for that. But the economy is defying low levels of consumer and business confidence triggered by last summer’s debt ceiling debate in the U.S. and political dithering in Europe.
Speaking of Europe, officials there reached a broad accord on Thursday to retool the rescue package for Greece and other indebted euro zone countries. Greek bondholders will take a 50 percent haircut in the value of their holdings, which will bring down Greece’s debt burden from about 150 percent of the nation’s GDP to 120 percent by 2020 – still above the danger zone threshold of 90 percent. The €440 billion bailout fund known as the European Financial Stability Facility will be leveraged with funds from private investors, and it will be used to partially guarantee new bond issues from struggling governments in order to keep their borrowing costs manageable. In addition, European banks will be required to boost their capital ratios to help insure against losses from their sovereign debt holdings. Details remain murky, and some analysts wonder whether the plan can calm the financial markets for more than a few days, but it is the most serious step yet by European officials to get ahead of their sovereign debt crisis.
Correction: In last week’s “Good News Friday,” I said that the Philadelphia Fed Survey uses a diffusion index that measures the difference between the percentage of respondents who cite an increase in a given measure and those citing a decrease. It is, in fact, the percentage citing an increase plus one-half the percentage citing no change. It may not matter to you, but I will sleep better at night.
Have a great weekend.
SVP, Chief Economist
Grubb & Ellis
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