The Economy is Looking Up

The US reported that Gross Domestic Product (GDP) increased at a 2.0% annual rate in the third quarter, in line with market expectations and a sign that the worst of the slowdown may already be behind us. Consumers, who have been reluctant to increase spending raised their outlays at the fastest rate since fourth quarter of 2006 mostly due to the strongest increase in spending on services since 2007. The increase in spending on services featured strong growth in transportation, recreation and food services (restaurants) all of which suggests that consumers were more willing to spend on non-necessities. A healthy sign that households are feeling better and are starting to spend again.

Businesses are also boosting spending. In the third quarter business spending on equipment and software increased at a 12.0% annual rate, the fourth consecutive quarter of double digit growth in business investment. With corporate profits almost back to their pre-recession peak businesses are flush with cash, a trend that has historically led to more hiring in the future.

Final sales to domestic purchasers, a measure of actual demand in the US increased at a 2.5% annual pace, following a 4.3% annual rate of increase in the second quarter. Those were the best two back to back quarters since mid-2005. This also indicates that the domestic economy is not losing steam, but continuing to grow at solid pace.

For the real estate sector, healthy domestic demand will lead to rising employment. This is also suggested by the strong growth in corporate profits. Once employment growth picks up steam, the recovery will get even stronger leading to further increases in demand for space.

Although there is currently consternation about the economic recovery, this report suggests that it is healthy and may be stronger than is thought.

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