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After four consecutive quarters of negative Gross Domestic Product (GDP) growth, 3rd quarter news was welcomed by investors. The United States economy expanded at a 3.5% annual rate for the July to September quarter. While the three-month growth in GDP technically represents an end to the recession, on a year-over-year basis, economic activity is still down 2.3%.
GDP growth was driven primarily by a 3.4% increase in consumer spending. Most of the increase in spending was a result of federal stimulus programs such as “cash for clunkers” and the first-time home buyer credit. New home construction continued to grow at an annual rate of 23% as homebuyers rushed to take advantage of the tax credit for first-time home buyers. New home purchases should continue to rise as Congress decided to extend the first-time home buyer tax credit. Critics argue that these programs are simply shifting “growth” from the future to today.
The dollar hit a 14-month low during the first week of October, despite moves by central banks in Hong Kong, Indonesia, the Philippines, South Korea, Taiwan and Thailand to attempt to slow the dollar’s decline against their currencies. These central banks are trying to slow the dollar’s decline because they are concerned that the weak dollar could negatively impact their export-driven economies. Amid fears of a weakening dollar, gold prices continued to gain, closing at $1,043, up nearly 20% year-to-date.
Although the economy showed signs of growth and the recession is technically over, high unemployment continues to be a thorn in the side of economic growth. October saw consumer confidence dwindle as unemployment continued to rise towards 10%. In addition, the rapid growth in government spending has led to an increased fear of future inflation.
Until unemployment stops rising, we can expect consumer confidence to remain cautiously optimistic at best. Looking forward, it remains to be seen if GDP growth will continue to rise at the pace it did in the 3rd quarter. Without a resumption of private investment, it will be up to the government to continue to put the stimulus money to work for the economy to grow. As the Fed continues to keep interest rates low, business investment should pick up, which will hopefully put an end to the month after month rise in unemployment. However, economists expect that unemployment will continue to grow through mid 2010.
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