GDP Growth Slows to 1.6%

The GDP report this morning surprised investors to the downside at only +1.6% versus expectations of more than 2% growth in the third quarter. The plunge in residential investment carved about 1% off the GDP result. On a positive note, the rate of inflation as measured by the personal consumption expenditure index slowed sequentially and consumer spending rose nicely.

What do these results mean to us?

• Inflation looks to be under control, allowing the Fed to stand pat on interest rates for the time being.
• Growth in the economy, ex-housing, looks fine - consumer spending rose 3.1% for example. But we wonder how long the overall economy can continue to grow when such an important component, housing, is in freefall.
• Slowing GDP growth will ultimately impact corporate earnings growth. We've enjoyed a string of double digit profit growth quarters - this can't continue forever (unfortunately) so stocks could be vulnerable after the strong gains since last summer.

The good news is that our economy is diverse enough to absorb the shock of a collapse in housing and still grow. As a result, we think the risk of a recession is fairly low. However, the likelihood of subpar growth for the next several quarters has increased and investors will need to get used to slower earnings growth as we head into the new year.

Oh, and don't forget, these numbers are subject to revision and may be better (or worse) than today's report!