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Increased spending on consumer services is a very positive sign for the economy, but imports continue to be a headwind to GDP, says Morningstar's Bob Johnson.

Transcript

Morningstar.com Highlights and Lowlights in the GDP Report Reading Indicators with Bob Johnson Jeremy Glaser: For Morningstar.com I’m Jeremy Glaser. GDP growth clocked in at 2% in the third quarter driven by a better than expected consumer. I’m here with Director of Economic Analysis Bob Johnson to take a deeper look. Bob thanks for talking with me today. Bob Johnson: Great to be here. Jeremy: So anything that surprised you is the consumer that number really great this quarter? Bob: I was really pleased with the number it kind of 2.6% growth for the consumer which is 70% of GDP, that was a very good number and it’s been turning up for several quarters now so that number was really good because you know you an have growth and exports. You can have growth in productivity and other things happening but what really drives the economy overall is what our consumers spending and I think today’s number was a very good number. Jeremy: Consumers we’ve been worried about them about employment so high and you know wage growth something like it was stagnating or even moving backwards what do you think got people spending again in the quarter? Bob: Oh I think— well certainly we had near the end of the quarter, we had better markets and that may have helped a little bit, people may have felt more confident that they weren’t going to be the ones that are going to be laid off so I think it was probably a little bit of improve confidence on the part of the consumer there that did help them decide to spend a little bit more of their income and it’s interesting how they have been spending it too you know what’s been driving economy early on was the fact that they were buying goods and that was the big driver even though that’s a smaller part of the economy and less so on services and this time around the services growth was a bigger contributor GDP growth than the goods and I think that’s a very positive sign for the economy going forward. Jeremy: Now that’s something I know you have been looking for, for awhile, now that services are doing better should we just kind of ignore manufacturing or is it still something that’s going to be key to the recovery? Bob: I think manufacturing is always key early on and it always is and then as we get further into a recovery we’re now over a year into it. It begins to fall back a little bit. I mean you don’t have the meteoric growth that you have early on. You just have growth but it’s just not as much and I think today Chicago purchasing managers survey which was up over 60 and was great in every categories and is indicative you know manufacturing maybe going in out of the spotlight but it’s not falling to pieces neither. Jeremy: Now imports or something that actually held GDP back this quarter seems that consumers are buying but they’re not buying things that were made in the United States is that a problem for a long term growth? Bob: Well I think imports certainly were a problem this quarter, I had hoped for more improvement there. Now there were met exports, which are exports minus imports just took away 2-1/2 percent from GDP in the second quarter and I thought maybe we’ll get down to 1% to this quarter but unfortunately it still came in and add 2% so imports a big disappointment, apparently what consumers are buying are iPod flat screen TVs things that come overseas and exports to things like airliners or whatever want maybe as robust as we had all hope. And so that exports were disappointments this quarter the biggest one that really and not the numbers we saw. Jeremy: Turning to another big part of GDP is construction soon to be some signs of life and non residential and commercial construction but residential still seems to be a completely in the basement. Bob: Yeah. Jeremy: Any signs of that change any time soon. Bob: Well I think that the commercial will begin a slow ramp back up and as you point out it was a small help to the economy. I think the residential is such a tiny, tiny part of GDP anymore I mean the housing is important in how it’s prized but the new construction of home is really a tiny part of GDP so you even know the number was off something like 25%. It had very little impact on the GDP calculation because it is so small. Now the one thing a sense of optimism from going ahead, remember this quarter was when all the exploration of the tax clearance really began to kick in and so that was a huge negative for the sector this time around and also to some very weird calculations brokers commissions are a big factor in that number and we had a lot in the June quarter when we had the rush to do before the credits expire and now in the September quarter when the housing sales went down significantly which usually doesn’t affect GDP but it does affect broker commission so that was kind of an odd nuance that really hurt and I think we’ll still be flat in residential in the 4th quarter so I’ll be a help. Jeremy: So looking at this number it’s certainly below the long term trend at this growth rate are we going to be able to get back to closer to full employment or are we still in trouble in terms of jobs. Bob: Right now we’re at kind of 2% in terms of GDP growth and as you point out the normal trend is 2-1/2 to 3 and we’re find it even a little bit ;more than that to really make a significant dent in employment and then of course where I don’t see that. I mean I see the fourth quarter being better than the third quarter and third quarter was better than the second quarter so I think we will get a good trend going and I think we’ll continue with that but that’s not enough to really make a huge dent in the employment situation until construction comes back. I don’t think we really see a lot of hope for that getting a lot better in a hurry. Jeremy: And then looking forward, what your expectations for the fourth quarter next 2011 when the catalyst in their highs and you think might drive this numbers? Bob: Yeah I think 2-1/2% growth of real possibility in the fourth quarter as you point it out the residential which has been kind of negative or flat for a long time may actually be a small positive in the fourth. I’m still waiting for the net export number to be more of a help than a hindrance and I think with a dollar being down so substantially especially against the Euro in the last couple of months since the end of august I think that will begin to drive that net export number into a better situation. So that’s helpful and then I think retailers appear optimistic about fourth quarter sales than the holiday sales and I think that’s a good thing and maybe we’ll see another bump up yet in consumption so you put those all together I think we’ll see a little bit better fourth quarter probably maybe a little dicier but I think overall I think we’ll have a better number in the fourth and the third and then we’ll like look forward to 2-1/2 to 3% growth in the 2011. Jeremy: Bob as always thanks for your insights. Bob: Great to be here. Jeremy: For Morningstar.com I am Jeremy Glaser.