Housing Prices and GDP: A Factual Explanation

An awfully crass and ignorant piece of journalism from Jeannine Aversa, an Economics writer at Associated Press:

WASHINGTON (AP) -- Economic growth slowed to a crawl in the third quarter, advancing at a pace of just 1.6 percent, the worst in more than three years.

The latest snapshot of the economy, released by the Commerce Department on Friday, showed that the slumping housing market figured prominently in the economy's dramatic loss of momentum. Investment in homebuilding was cut by the biggest amount since early 1991.

Then later, after destroying the republican administration for causing this, some experts chime in with real opinions (despite the fact that apparently the Bush administration is seeking to 'downplay' the recent figures):

The Bush administration quickly sought to downplay the slowdown in economic growth.

"Everybody expected this. You have a combination of rising energy prices and also rising interest rates, and now you've seen a reverse on both," said White House press secretary Tony Snow.

Commerce Secretary Carlos Gutierrez said that latest GDP figures displayed the economy's resilience even as the housing market has tanked. "I would not panic about this," he said in an interview with The Associated Press.

Treasury Secretary Henry Paulson struck a similar note. He said the housing boom over the last five years was "clearly unsustainable" and that the housing market "needed to have a correction" by slowing to a more sustainable pace.

Democrats argued that the slowing in overall growth is evidence that the administration and the Republican-controlled Congress aren't doing a good job handling the economy.

"This report undercuts the President's claim that his tax cuts are working," said Sen. Jack Reed, D-R.I.

And finally, Ms. Aversa kills Wall Street:

On Wall Street stocks sagged. The Dow Jones industrials were off 45 points in morning trading.

"The economy's dramatic loss of momentum." I cannot believe I am hearing this right now.

Despite the Dow trading at record all-time highs, the NASDAQ trading at record five-year highs, stocks 'sagged' since the U.S. economy is slowing 'to a crawl'. This is wrong on so many levels. First of all, of course housing is off - markets have shot up the past few weeks like rockets. Where else is the money going to come from to fund equity investments other than alternative investments like houses, bonds (which are down too) and recent commodity gains? Investors are just becoming more bullish and more speculative with their capital by employing it in the equity markets. There's deposit accounts, of course, where the money can come from too, but this is hardly a primary source for capital relocation (why would you put $1 million on a deposit acount paying 3.5% interest when you can throw in a higher-rate T-Bill?).

Secondly, while private investment takes shape in an economy, productivity generally does not increase that much, largely because the result of the productivity is not seen until the private investment yields material returns. With investment only just beginning to pay dividends now, it's hardly fair to say that the U.S. economy is slowing 'to a crawl.'

Journalists do no service to the general investment education of the public not to point these things out, and they do no service to their own economies either. Instead you have to find it on a blog like this. Right now most of the media is scared to point out the latest bullish trends, largely because they fear getting caught and looking ridiculous if the markets plummet again. It's the herd mentality. Steer clear of the herd, and steer clear of overly-simplistic journalism.

Comments

[Coggieguy]

I really want the whole stinking herd to go bearish so I can put all my cash into quities with confidence. My only concern is this: Are the bear stories from the press due to a) shilling for the dems or b) the usual press incompetence in telling which way the wind is blowing? I prefer it to be the latter, as that is a 100% buy signal. (Past performance is no guarantee of future results....heh)

[Daniel M. Harrison]

It's the latter. The problem with journalists when they write about the market is two-fold: one, they are usually trained in journalism, not in business or finance. They don't really understand the economy - let alone the markets - at all (remeber how many times they predicted a bear market in the 90's; despite the fact that one actually came, had they been running money they would have been out in about 1995, when the thing was just getting started).

The other problem is that journalists are trained to bundle things up into packages of simplicity, which works sometimes but tends to grossly oversimplify the economy. (For example, how many pieces of journalism have you seen so far pointing out the difference between speculative and genuine demand for oil futures contracts? - none. There's a big difference, and it's that difference which has forced the price off so much.)