"The economic data show some mixed signs over this past month. The good news, though, is that the economy is still growing. The bad news is that it's not growing as fast as expected. It's a sign of a strong economy, however, if that's the extent of the bad news.
To be more specific, the accompanying chart indicates that real GDP grew by 0.39 percent over the third quarter of this year, translating to a 1.6 percent annualized rate. While this is still growth, it's slower than expected. It's also less than last quarter's 2.6 percent and the first quarter's 5.6 percent growth. A lot of the reason for the lower growth is the housing sector. Residential investment (i.e., housing starts) declined over the quarter, which is related to what is happening with housing prices. Outside the housing sector, the economy continues to show strong growth.
Regarding housing prices, their growth rate has slowed considerably. Real estate developers, responding to the expectation of higher housing prices, previously were increasing residential building. As the anticipation of higher prices has not been fulfilled, housing starts have declined. This is as one would expect from a market-based economy. Prices implicitly direct a lot of economic activity, i.e., away from things with low prices (relative to cost) and toward those with a higher price. This is a good thing for the economy; a higher price indicates it's something consumers especially value, and producing more of it is serving consumers' desires. The market is revealing that the value of housing is not growing much, and so fewer resources are being devoted to expanding the housing stock. One expects that the resources devoted to house building will be directed to other parts of the economy. As that happens, more robust GDP growth will occur. Housing is not a "bust" market by any means, though. In many parts of the country, house price appreciation has slowed or been nil, but prices are still above the level of a year ago.
Other pieces of economic news remain reasonably good. Payroll employment for the U.S. economy continues to show steady growth. The economy's unemployment rate dropped again to 4.4 percent. The consumer price index actually fell during September. A major reason for this is the decline in energy prices.
The Bluegrass region also shows generally steady performance. Total payroll employment continues to rise. The data also show a sharp drop in the unemployment rate for September. This statistic, though, is one that continually gives me fits. It jumps around a lot and, unfortunately, its short-term variations don't mean a lot.
John Garen is department chair and Gatton endowed professor of economics at the University of Kentucky.