Thursday, August 28, 2003

Remember when considering the revised GDP figures today that the two biggest contributors by far were consumer durables and military spending. These two sources of economic growth probably won't do a repeat performance in 2003:III. Spending on consumer durables was driven largely by the refi boom. The spending splurge made possible by homeowners refinancing their mortgages and spending the 'savings' on furniture, refrigerators and toys for the garage may have spilled over into July, but don't count on a quarter-wide contribution.

Military spending will continue to be very large and is the real wildcard. In 2003:II it went up by $47.5bn, and in light of the comments of Paul Bremer and the Republicans in Congress, the spending could continue to rise and rise. Defense spending could keep this economy chugging all summer long. And who cares -- the day of reckoning is far off -- unless, of course, you're a federal worker.

One final note. GDP revised upwards thanks to smaller than expected trade deficits. With the rising dollar since June, these deficits should return to all-time record territory in no time.


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