Economic Ups and Downs

Some good and bad news on the U.S. economy, courtesy of your friendly governmental beaurocrats. The good is that Q3 GDP was 4.9%, it’s strongest level in four years and a full point higher than initial estimates. The bad is that the White House has made downward revisions to its 2008 economic outlook, by cutting anticipated GDP growth from 3.1% to 2.7 percent.

It’s also worth noting that good and bad news is also a question of perception. Economic slowdown is obviously problematic for average folks, but not necessarily for private equity pros. So long as firms didn’t buy too many companies at inflated prices between 2006-Q2 2007 (KKR, put your hand down), then we could be in for the type of bargain-hunting that typically produces the most outsized PE returns.

Here’s an AP story just off the wires on the White House projections:

WASHINGTON (AP) – The White House on Thursday lowered its forecast for economic growth for next year and said unemployment will likely rise as the housing slump and tight credit stunt business expansion.

Under the administration’s new forecast, gross domestic product, or GDP, will grow by 2.7 percent next year. Its old projection called for a stronger, 3.1 percent increase.

“The housing market decline has been more significant that we expected,” Edward Lazear, chairman of the White House’s Council of Economic Advisers, told reporters in a conference call. That more pronounced housing slump — along with the expectation that problems will persist into next year — was a big factor in the administration’s downgrade of its economic growth forecast for 2008.

With the projection of slowing economic growth, the unemployment rate is projected to move up to 4.9 percent next year. That’s up from a previous forecast of a 4.7 percent jobless rate but still would be considered fairly low by historical standards. The unemployment rate last year dipped to 4.6 percent, a six-year low.

Inflation, however, should improve. The White House expects consumer prices to increase by 2.1 percent next year, a moderation from a previous forecast of a 2.5 percent rise. That’s encouraging news as oil prices have marched past $92 a barrel.

“While the difficulties in housing and credit markets and the effects of high energy prices will extract a penalty from growth, the U.S. economy has many strengths, and I expect the expansion to continue,” said Treasury Secretary Henry Paulson.

The odds of a recession have grown this year. But the Bush administration, Federal Reserve officials and others remain hopeful that one can be avoided.

The big worry for economists is that consumers and businesses will cut back on spending and investing, sending the economic growth into a tailspin. Spending by consumers and businesses is the lifeblood of the country’s economic activity.

The White House’s economic forecasts are issued twice a year. The projections were developed mainly by a team from the Council of Economic Advisers, the Treasury Department and the Office of Management and Budget. The administration’s projections are in line with those offered by private analysts.