Consumers Lead Growth, and Business Investment

Financial FAQs

The U.S. economy grew at a faster 3.7 percent annual clip in the second quarter, up from the initial estimate of 2.3 percent, the Commerce Department said Thursday. Why was that a surprise to those short sellers afraid of Chinese market contagion, now that the DOW and all stock indexes have soared over the past 2 days?

It’s a repeat performance of the past 2 years. Those severe winters stopped growth in the first quarters of 2014 and 2015, which then snapped back once the Polar Vortex deep freeze melted away. Q1 GDP grew just -0.9 and + 0.6 percent, respectively during those winters. But the Q2s rebounded to 4.6 and 3.7 percent, respectively, once Spring came. So China’s economic ups and downs have had very little effect on U.S. growth.

Graph: Trading Economics

Economists had forecasted gross domestic product would be revised up to 3.3 percent, but business investment was stronger than expected. Business investment helped, but it was consumers, buoyed by low interest rates and inflation boosting their confidence in future jobs and rising incomes that got them spending again. There were no ‘confidence fairies’ worried about budget deficits, in other words.

Consumer spending, always the main engine of U.S. economic activity, led the way. Spending was revised up to 3.1 percent from 2.9 percent in the second quarter after a sluggish 1.8 percent gain in the first three months of the year. No wonder, when eastern and Midwestern shoppers could barely venture from their homes during the deep freeze.

And newly revised figures from the Commerce Department show that businesses invested at a faster rate. Businesses increased investment by 3.2 percent increase instead of a drop of 0.6 percent, with spending on structures such as office buildings rising by 3.1 percent instead of an initial drop of 1.6 percent.

This is huge for real estate, in part due to lower interest rates holding down construction costs. But there was also a large build in retail inventories in anticipation of back to school and holiday shoppers. The value of inventories, which adds to GDP, increased by $121.1 billion in the second quarter instead of a previously estimated $110.0 billion.

In fact, it was real (after inflation) final sales to private domestic purchasers up 3.3 percent, a measure of activity without inventories, that did the most to boost GDP growth.

The bottom line is that consumer confidence is soaring to new heights, as we said yesterday. An enormous improvement in the current labor market (e.g., rock bottom initial unemployment claims) drove the consumer confidence index well beyond expectations, to 101.5 in August for a more than 10 point surge from July. A rare 6.5 percentage point drop to 21.9 percent in those describing jobs as currently hard to get points to outsized gains for the August employment report.

Why is this a surprise? With the unemployment rate down to 5.3 percent, and more than 8 million jobs created since 2008, maybe consumers are finally convinced the U.S. economic growth is for real. The gain for this confidence reading lifts the present situation component, a near term confidence reading, to 115.1 for a more than 11 point increase over July that points to consumer power for August (and maybe September, October, then into the holidays).

Graph: Econoday

With consumer spending soaring, corporate profits continue to surge, hence the increase in business investment. Just reported profits in the second quarter came in at $1.824 trillion, up a year-on-year 7.3 percent.

So let’s not forget that gas prices are closing in on $2 per gallon in many parts of the country, which holds down inflation, which in turn boosts incomes. So consumers are beginning to show they are the real beneficiaries of lower oil-energy prices, no inflation pressures, and rising incomes.

Harlan Green © 2015

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Low Inflation Everywhere Is Shrinking Growth

Popular Economics Weekly

Deflation is a rising risk for the U.S. economy based on import and export price data where contraction is at its most severe since the 2008-2009 recession, as well as for the rest of the world. U.S. import prices fell 2.8 percent in January alone for year-on-year contraction of 8.0 percent. And it's much more than just the impact of the strong dollar as export prices are also in contraction, at minus 2.0 percent for the month and minus 5.4 percent on the year, reports Econoday.

Graph: Econoday

Another sign of deflationary tendencies is that U.S. consumer spending barely rose in January as households cut back on purchases of a range of goods, suggesting the economy started the first quarter on a softer note. Sluggish spending came despite cheap gasoline and a buoyant labor market, leaving economists to speculate that consumers were using the extra income to pay down debt and boost savings.

 

Graph: Thomson-Reuters

The Commerce Department said retail sales excluding automobiles, gasoline, building materials and food services edged up 0.1 percent last month. But overall retail sales slipped 0.8 percent in January, declining for a second straight month as falling gasoline prices undercut sales at service stations. This is after consumer spending, which accounts for more than two-thirds of U.S. economic activity, expanded at its quickest pace since 2006 in the fourth quarter.

Graph: Trading Economics

But even falling gas prices are a sign of deflation, as it means there is lower demand for energy products everywhere in the world, as I said. In fact, consumer prices are already falling in the Eurozone, -0.2 and -0.6 percent, respectively, in the past 2 quarters, signaling an outright recession. Paul Krugman has even said the Eurozone is now in their Second Great Depression.

Graph: Calculated Risk

So why are consumers paying down debt with their extra pocket money? The preliminary University of Michigan consumer sentiment index for February was at 93.6, down from 98.1 in January. Higher gasoline prices are probably the reason for the decline in February, and that’s enough to make consumers more cautious with their spending.

Harlan Green © 2015

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

What Happens in 2014??

Popular Economics Weekly

Next year could start with a bang. U.S. third quarter Gross Domestic Product expanded at 4.1 percent, revised up from 3.6 percent, with consumer spending a main driver of growth. This has to mean consumers are feeling prosperous again, and if employment continues to rise as predicted by the Fed, and others, so will consumers’ incomes and spending.

Retail sales are also strong with the holidays looking good.  Overall retail sales in November jumped 0.7 percent, following a rise of 0.6 percent the month before (originally up 0.4 percent).  Autos were a big part of the November boost, gaining 1.8 percent after a 1.1 percent increase in October, so that annual sales are approaching 5 percent, and 6 percent is closer to a normal sales rate, and full employment.

Graph: Econoday

The Kansas Federal Reserve Bank just released a study that says single family starts could increase by 150 percent from 2012 to their peak in 2021 (Chart 1). The annual level of starts at this peak is about the same as in 2002, one year into the single-family construction boom. Single-family construction is then projected to fall over the subsequent decade.

Graph: Calculated Risk

Demand in particular was raised in the GDP report, and increasing demand for goods and services is what induces businesses and economies to grow. Final sales of domestic product were revised up to 2.5 percent, compared to the second estimate of 1.9 percent and 2.1 percent in the second quarter. Final sales to domestic purchasers (which exclude net exports) were bumped up to 2.3 percent versus the second estimate of 1.8 percent and 2.1 percent in the second quarter.

Graph: Econoday

The best news of all was the bipartisan budget agreement that put off any talk of indiscriminate sequester cuts for the next 2 years. It will add back a total of $85 billion to government spending and will give an additional boost to growth in 2014. It has been the decline in government investments and employment in particular that have been the largest roadblock to increased growth.

Under the terms of the deal, spending for the Pentagon and other federal agencies would be set at $1.012 trillion for fiscal 2014, said the Washington Post, midway between the $1.058 trillion sought by Democrats and the $967 billion championed by Republicans. The Pentagon would get a $2 billion increase over last year, while domestic agencies would get a $22 billion bump, clearing space for administration priorities such as fresh investments in education and infrastructure.

Harlan Green © 2013

Follow Harlan Green on Twitter: www.twitter.com/HarlanGreen

More Jobs in 2011!

Popular Economics Weekly

The jobs market is in full recovery mode this spring. March seems to be the month when shoppers begin to shop in earnest and employers are hiring again. Both the service and manufacturing sectors of the economy are surging, labor productivity is high, and retail sales have shot up.

Nonfarm payroll employment increased by 192,000 in February, and the unemployment rate fell to 8.9 percent from 9.0 percent, the U.S. Bureau of Labor Statistics reported today.

December and January payrolls were also looking better. The change in total nonfarm payroll employment for December was revised from +121,000 to +152,000, and the change for January was revised from +36,000 to +63,000. The only real weakness was in government employment, which fell by 30,000. Local governments, many struggling with budget pressure, have cut 377,000 jobs since September 2008.

Retailers cut 8,000 jobs. Payrolls in goods-producing industries rose by 70,000 last month, including 33,000 in manufacturing. The sector has added 195,000 jobs since December 2009.

Activity for the bulk of the economy accelerated further in February from an already strong pace, according to the ISM's non-manufacturing report where the composite index rose three tenths to 59.7. This reading is important because the service sector is two-thirds of U.S. economic activity. Anything above a reading of 50 shows month-to-month growth and because it was above January also shows month-to-month acceleration.

February's strength is centered in output readings including acceleration for business activity (akin to a production reading on the manufacturing side) and in employment which came in at 55.6 for a more than one point gain and the best reading of the recovery, according to Econoday.

The 2.6 percent increase in Q4 labor productivity also signaled that employee costs are at an all time low (so no inflation danger), while workers productivity is maxed out (why hiring is picking up).

Year-on-year, productivity was up 1.9 percent in the fourth quarter-down from 2.9 percent in the third quarter. This is the most obvious sign that worker productivity—output per worker-hour—is maxed out. It is taking more hours for a single worker to increase output further, in other words.

Overall, the productivity and cost numbers have been favorable toward corporate profits as companies have squeezed more out of workers not laid off during the recent downturn. However, many economists doubt this pattern can continue and firms soon will have to boost hiring to maintain output and revenue gains.

The best sign of increased hiring is in fact state filings of weekly initial claims for unemployment, which has been plunging. Pointing strongly to month-to-month acceleration for payroll gains, initial jobless fell a substantial 20,000 in the February 26 week on top of a 25,000 decline in the prior week. The number of claims, at 368,000, is the third sub 400,000 reading in the last four weeks (note the February 19 week was revised 3,000 lower to 388,000). The four-week average, down 12,750 to 388,500, is the first sub 400,000 reading of the recovery, according to Econoday.

Lastly, though the 4^th Quarter GDP economic growth estimate was revised down slightly to 2.8 from 3.2 percent, final demand, its major component including all sales by domestic producers, jumped 6.7 percent. This is a combination of domestic sales and exports, which have also been surging.

We can therefore say that combined with ballooning retail sales—annualized motor vehicle sales have climbed above 13 percent with U.S. companies like GM showing 40 percent sales’ increases, that we are finally in full recovery mode.

Harlan Green © 2011

Higher GDP Growth = More Jobs

Popular Economics Weekly

The economy expanded at a 3.2 percent annual rate in the fourth quarter of 2010, according to the preliminary report on gross domestic product (GDP) from the Commerce Department.  Final sales of goods and services — a better measure of underlying demand than GDP — grew at a blistering 7.1 percent annual rate, offering hope for job creation going forward.

Although last Friday’s unemployment report was subpar, it was mostly due to weather.  The  Bureau of Labor Statistics estimated that 886,000 workers either stayed home, or weren’t hired because of the horrific weather, which translates into 100-200,000 jobs lost that would have been counted in better weather, according to Barron’s economist Gene Epstein.  So look for a big jump in job creation next month.

The pace of monthly job losses slowed dramatically soon after President Obama and Congress enacted the Recovery Act in February 2009. The trend in job growth this year has been difficult to discern because of the rapid ramp-up and subsequent decline in government hiring for the 2010 Census (which is now largely over), but private employers added a total of 1.3 million jobs to their payrolls in 2010, an average of 112,000 jobs a month.

The bottom line is that final sales, which are sales made by domestic producers, have picked up significantly, which means employment has to pick up.  Growth in real final sales to domestic purchasers (takes out net exports) picked up to 3.4 percent, following a 2.6 percent boost in the third quarter, almost in line with the increase in consumer retail sales. 

The first indication of a jobs pickup in the New Year is the Institute of Supply Management’s manufacturing survey, which increased across the board. Indicating a true surge underway in the nation's manufacturing sector, the ISM composite index jumped nearly 2-1/2 points to a rare plus 60 reading at 60.8 for a seven-year high (prior month revised to 58.5). New orders are the leading component, up nearly six points to 67.8 in a gain that points to a run of 60 readings ahead for the composite index. The other four components of the composite also show month-to-month acceleration including employment which is also in rare territory at 61.7 for a nearly two-point gain and the first plus-60 reading in seven years.

Another sign of increased employment is the rise in personal incomes and spending, which means consumers feel more confident about their jobs. Both income and spending continued to advance at the consumer level in December. Personal income in December rose 0.4 percent for the second month, while real personal consumption expenditures is rising at almost 3 percent annually.

GDP got a nice lift from the consumer sector (i.e., retail sales) last quarter and it looks like the consumer mood is improving slightly this quarter. This past week both the Conference Board’s consumer confidence index and the Reuters/University of Michigan consumer sentiment index improved from their prior readings. Consumer confidence picked up sharply in January led by a big improvement in the assessment of the jobs market. The Conference Board's index jumped more than seven points in January to 60.6 with those saying jobs are currently hard to get falling more than 2-1/2 percentage points to 43.4 percent for the best reading in two years.

The University of Michigan consumer sentiment index Consumer optimism is as strong as it's been since mid-year based on the implied second-half January reading of the consumer sentiment index. The index rose 1.5 points to 74.2 from the mid-month reading of 72.7.  For final January, details show special strength in expectations, the index's leading component which is also at its best level since June.

On the inflation front, the PCE price index jumped 0.3 percent, following a 0.1 percent uptick in November. But the he core rate came in unchanged after edging up 0.1 percent in November. On a year-ago basis, headline PCE prices are up 1.2 percent, compared to 1.1 percent in November. Core inflation eased to 0.7 percent year-on-year versus 0.8 percent in November.

So it should mean a surge in hiring this year with both employers and employees more optimistic about future prospects. And inflation looks to be at the bottom end of the Fed’s range, so the Fed is in no hurry to raise interest rates. Such low interest rates also mean real estate has the chance to improve this year.

Harlan Green © 2010