Signs of life may restrain Fed

Economic growth is weak, to be sure, but consumer spending is enough to keep the Fed cautious about quantitative easing.

By Jim J. Jubak Oct 29, 2010 7:35PM

Jim JubakThe first estimate for third-quarter U.S. gross domestic product growth came in right on projections at 2%. That was up from the 1.7% growth rate in the second quarter, but below the 3% or so growth rate needed to cut significantly into unemployment.

Housing was the big drag on the economy. (Big surprise, right?) 

Residential investment -- home buying to most of us -- fell 29% in the quarter. That more than offset a 9.7% gain in nonresidential investment. Nonresidential structures -- commercial real estate -- grew by 3.9% in the quarter, up from a drop of 0.5% in the second quarter. That's good news for the still beleaguered commercial real estate market (and the banks with big loan portfolios in the sector). 

The bright spot in the numbers belonged to consumer spending, which grew by 2.6% in the quarter. That was the strongest quarterly growth rate since the fourth quarter of 2006 and a significant increase from the 2.2% growth rate in the second quarter.  

The growth rate for consumption of goods (2.8%) and services (2.5%) was about equal, but that disguises a big increase in the consumption of services from the second quarter, when it grew by just 1.6%. 

What conclusions can we draw from today's numbers? 

First, economic growth remains weak enough so that the Federal Reserve is likely to go ahead with its second round of quantitative easing. (To get a fuller idea of how the Fed sees the US economy right now, see my post on the recent durables orders report.) 

Second, although growth remains weaker than the country needs to cut into unemployment, the signs of life among consumers are encouraging. 

And third, the combination of weaker-than-desired growth and signs of improvement in consumer spending is likely to keep the Fed cautious and lead to a very carefully staged month-to-month program of quantitative easing that allows Ben Bernanke and gang to call off the program if the economy starts to pick up speed.  

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 

Nov 1, 2010 12:21PM

Agreed.  Seems like a measured response of $50-100b a month and watch the numbers (jobs, cpi, etc.) and hopefully we'll achieve a sloow liftoff and they can start to moderate with interest rate increases some time in 2011-2012.  Build equity positions and sell bonds as this plays out.


Nov 1, 2010 5:07PM
QE2.  The screwing of savers and raping of taxpayers continues.
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
100 character limit
Are you sure you want to delete this comment?


Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.


StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

125 rated 1
267 rated 2
455 rated 3
612 rated 4
682 rated 5
695 rated 6
632 rated 7
472 rated 8
279 rated 9
147 rated 10

Top Picks

TAT&T Inc9



Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.