In the third-quarter, gross domestic product (GDP) advanced at its slowest rate in over a year, increasing just 2.7%, the Commerce Department reported. This could signal the much-sought-after “soft landing” or easing of the economy’s high-flying pace, reducing concerns about inflation and restraining the Federal Reserve from further interest rate hikes.

The good news is that a slower economy may lead the Fed to cut interest rates in 2001.

The third quarter figure follows growth of 5.6% in the second quarter. Also notable is that a measure of core inflation, the GDP deflator, declined to 2% in the third quarter, from 2.4% previously.

The decrease in housing construction is said to be a major factor in the reduced growth seen in the third quarter.

The Commerce Department also reported that inventories increased 0.7% in August, growing faster than the 0.5% growth for sales. With inventories outrunning sales, this is additional evidence of an economic cooling.

The Conference Board announced that its index of leading economic indicators declined by 0.1% in August. This was the third decrease in the index in four months, yet another signal of slower growth.

Housing Forecast

His forecast still indicates weakening in the economy and in housing from the rates seen in 1998-99 and the first half of 2000, but his landing is even softer than previously predicted.

He has upgraded all measures of housing activity, including starts, sales, mobile home shipments, and remodeling, for the end of 2000 and 2001-02. For the same period, he has also made modest upgrades to his forecasts for GDP growth; he has removed projected modest increases in the yields on both fixed-rate and adjustable-rate mortgages; and he has made slight reductions in the projected unemployment rate during most of the 2001-02 period.

Some experts believe that unique factors may have constrained growth in the third quarter, and it will pick up again this quarter. Growth, however, is not expected to hover near 6%, but rather in the 4% range.

Seiders stated that it’s difficult to nail down prospective changes in the world oil markets, let alone the Fed’s reactions to such events. There is a danger that such external factors could turn out to be more serious than current assumptions. In that event, he believes the Fed could sit back and allow the economy, and housing, to weaken more than indicated in the current forecast, taking the opportunity to reduce inflation risks in the process.

But the dramatic upgrades to productivity growth in recent years, and the corresponding reductions in inflation pressures, presumably would lead the Fed to counter serious foreign shocks to the U.S. economy with monetary ease, rather than sitting back and watching.

Publication date: 11/13/2000