Tuesday, September 16, 2014
Inquirer Daily News

Economic super ball bounced strangely

Economics in a nutshell: The economy didn't look like a super-ball as the bounce back from the end of year slump was nothing spectacular.

Economic super ball bounced strangely

The economy grew less than most expected in the early part of the year as the major restraints to growth, falling inventories and collapsing defense spending, eased only partially.
The economy grew less than most expected in the early part of the year as the major restraints to growth, falling inventories and collapsing defense spending, eased only partially.

INDICATOR: First Quarter 2013 GDP

KEY DATA: GDP: +2.5%; Consumption: 3.2%; Federal Government: -8.4%

IN A NUTSHELL: "The economy didn't look like a super-ball as the bounce back from the end of year slump was nothing spectacular."

WHAT IT MEANS: The economy grew less than most expected in the early part of the year as the major restraints to growth, falling inventories and collapsing defense spending, eased only partially. Businesses did start rebuilding inventories but not nearly at the pace that they emptied the warehouses at the end of last year. Their cautiousness could also be seen in the smaller growth in spending on software and equipment. As for defense spending, it fell sharply again but the 11.5% decline was half the drop posted in the previous quarter. On the positive side of the ledger, solid consumer spending led the upturn. People bought lots of durable goods, soft goods and even services. Housing continues to add greatly to the economy. Inflation remains well contained, rising just a little over 1%. There was a warning that consumer spending may not hold up as the savings rate dropped sharply to 2.6% form the 3.9% it averaged in 2012.

MARKETS AND FED POLICY IMPLICATIONS: While this was a disappointing report it was so only if you thought growth would exceed 3%. While I was on record as having a 2.7% growth forecast, there was every reason to think that inventories could be rebuilt more strongly and that defense spending would not fall nearly at the pace it did. Indeed, those two factors are causing me to raise my second quarter forecast a bit. There is still some room left in the warehouses and do we really need another double-digit reduction in defense spending? Well, maybe the sequester will do the trick and help restrain spring and summer defense and national economic growth. But what this report says is that the economy continues at a brisk walk at best. It has yet to start running let alone sprinting. With the tax cuts reducing disposable income and sequestration restraining federal spending, don't expect strong economic growth anytime soon. This mediocre growth pace reinforces what Fed Chairman Bernanke has been saying for a long time: The budget deficit must be addressed but not all at once. You cut small amounts when the economy grows slowly and more when it is strong. Though he didn't say this, I am sure he would also agree that you should cut intelligently, something Congress doesn't consider a necessity. This growth rate is not likely to make investors happy at all but we still are in earnings season so let's hope they are good.

About this blog
Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm in Bucks County. He advises companies across the country on the risks and opportunities that economic developments may have on the organization’s operating environment. An accomplished public speaker, Joel’s humor and unique ability to make economics understandable have brought him a wide following. Reach Joel at joel@naroffeconomics.com .

Joel Naroff
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