Wednesday, June 3, 2015

Lack of spending threatens growth

Economics in a nutshell: Growth was better than expected in the summer but weak business and household spending raises questions about its sustainability.

Lack of spending threatens growth

INDICATOR: Third Quarter GDP/Weekly Jobless Claims

KEY DATA: GDP: +2.8%; Consumption: +1.5%; Equipment Investment: -3.7%/Jobless Claims: 336,000 (down 9,000)

IN A NUTSHELL: "Growth was better than expected in the summer but weak business and household spending raises questions about its sustainability."

WHAT IT MEANS: The economy grew a bit faster than expected during the summer. But the details are not as positive as the headline number and they raise questions about future growth. Consumers bought more goods, but much of the demand came from rising vehicle purchases. That is great except sales are nearing more normal levels, reducing the opportunity for continued robust gains. The October sales pace was 3% below the third quarter average. Critically, service demand, which is two-thirds of consumption and forty-five percent of the economy, remains in the dumps. It is hard to grow rapidly when the largest segment of the economy is going nowhere. There is also an issue with business investment. Firms built new plants, though I have no idea why. But spending on equipment was off and intellectual property products purchases were modest. Rising inventories are also troubling. Facing a government shut down and debt ceiling crisis, did firms really add to their stocks because they thought demand would grow? I don't think so. The inventory build may have been due to an overestimation of household and business demand. That would lead to a reduction in inventories and a slowing in growth this quarter. Housing was strong but similar to vehicle sales, that too should moderate. The trade deficit narrowed for the right reason: Expanding exports exceeded increasing imports. That will continue only as long as the U.S. economic expansion remains moribund. Also, improving financial conditions at the state and local levels meant that component is now adding to growth. If only the federal government stopped stepping on the brake we could see a faster economic expansion. Inflation accelerated, which is actually a good sign. Most Fed members are concerned about low not high inflation.

Jobless claims are back down to levels that indicate job growth should improve. Tomorrow we get the October employment numbers and the extent that the shut down affected the data is a mystery. There is not a lot of hope for a good report.

MARKETS AND FED POLICY IMPLICATIONS: I doubt investors will love this report. The headline growth and inflation numbers may create concerns that tapering will begin sooner than expected. That is not likely, though. On the other hand, the details make it clear that the economy had enough momentum to withstand the shut down but not so much that it wasn't harmed. Fourth quarter growth, which is really what matters now, is likely to be well below the last two quarters. Consumer confidence is down and Bloomberg's Consumer Comfort Index fell for the sixth consecutive week. That should not surprise anyone as we are going into another holiday shopping season where workers have no more money to spend than they did last year. Thus, fourth quarter consumption growth could be weak and early next year we get into the next round of potential Washington Wackiness. The economy just cannot catch a break.

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 L. at joel@naroffeconomics.com .

Joel L. Naroff