Business Insider

Peter Crabb: Good economic tidings lighten this holiday season

The joy of last summer is making for a more joyous holiday season.

The U.S. Bureau of Economic Analysis announced this week that real gross domestic product increased at a faster annual rate in the third quarter of 2010 than was previously reported. GDP is measured 12 times each year - three estimates for each quarter.

In the first GDP release for the third quarter, the BEA estimated that the economy was growing at a 2 percent annual rate. This measure was raised to 2.5 percent in the second estimate for the quarter last month, and then raised again to 2.6 percent for the “final” estimate released this week.

The BEA says the final estimate is “based on more complete source data.” GDP was revised upward primarily because inventory investment was higher. This is a strong indicator of better economic conditions. Real GDP measures the total output of goods and services produced by labor and property in the United States. There are four output categories: consumption expenditures, investment expenditures, government expenditures, and net exports.

The value of goods that companies produce and then hold in inventory is included in Investment expenditures. Companies will increase these expenditures only if the outlook for future sales is good. The upward revision suggests companies were increasingly optimistic this past summer.

All this optimism is coming to fruition this holiday season. The U.S. Census Bureau announced last week that retail sales for November were 7.7 percent higher than the previous year. The National Retail Federation expects a 3.3 percent increase in holiday sales this year over last.

The financial markets are now sharing in the improved outlook. The Dow Jones Industrial Average is nearly 7 percent higher since the end of the third quarter in September, returning to a level not seen since before the financial market collapse in September 2008. Interest rates on long-term bonds have also risen in response to higher expected growth.

A strong showing on the retail front improves the fiscal outlook for Idaho. Derek Santos, economist for the Idaho Division of Financial Management, reported that Idaho General Fund revenues in November exceeded anticipated revenues for the fifth consecutive month. For the 2011 fiscal year that began last July, Idaho income, sales, and product taxes are all coming in faster than expected.

Stronger retail sales may further suggest an improving employment situation. The U.S. unemployment rate didn’t begin to decline following the last recession in 2001 until retail sales starting growing at the pre-recession rate of around 4 percent annually.

The true joy of this season doesn’t come from a store, but strong sales will likely bring economic joy in the New Year.

Peter R. Crabb is a professor of finance and economics at Northwest Nazarene University in Nampa. He earned his doctorate in international and financial economics from the University of Oregon.