The economy is growing, consumers and business are spending, but happy days are not here again. That is, if you define happy days as strong economic growth.
Lots of data were dumped today and they tell largely the same story. Consumer spending was up in November, but if you adjust for inflation, it wasn’t anything special. The key factor was a major slowdown in durable goods consumption, driven by a softening in vehicle sales.
But it should be kept in mind that the sales pace was still robust, just not as huge as in October. It looks like consumption will be up only moderately in the final quarter of the year and that will likely keep overall growth from getting anywhere near what we had in the third quarter.
Looking forward, household incomes went nowhere. Workers may be hoping that wage and salary gains will accelerate, but they actually went backward in November.
Why that happened in anyone’s guess and it will be interesting to see what the December numbers look like. At least inflation remains well contained, though the Fed may not be overjoyed by that.
On the business side, demand for big-ticket items, excluding the volatile aircraft sector, was up solidly in November. Critically, business capital expenditures rose sharply.
This has been a major weak link in the economy and the failure of companies to upgrade their capital stock does not bode well for future growth. If rising investment becomes a real trend, growth should accelerate.
That, though, is not what we see from the Conference Board’s Leading Economic Index, which was flat in November. That came after only a modest rise in October. The modest rise in the leading indicators suggests we will not see a major surge in growth in the first part of 2017.
The third, and at least for a while, last reading of third quarter GDP showed that the economy grew at a strong pace. The revisions were not great in any major category but were largely across the board. And corporate profits were also stronger than initially thought, so firms do have the cash to invest in machinery, equipment, software and structures.
On the labor front, the surge in jobless claims is not worrisome. Trying to seasonally adjust weekly data is a thankless and pretty much impossible task, so even a few weeks of increases really mean little. Smoothing out the weekly numbers by using the four-week moving average indicates that the level of claims remains quite low.
MARKETS AND FED POLICY IMPLICATIONS: The first two months of job gains, income and spending data for the fourth quarter point to growth only in the 2% to 2.5% range. I am somewhat surprised by the consumption numbers as other reports seemed to indicate households were spending this holiday season.
Maybe we will get a late surge in demand. We shall see. But the real issue is wage growth. You cannot get consumers to spend more if they don’t have the money to spend, and they just don’t have that much more money to spend.
I may sound like a broken record, but that is simple math. We can talk all we want about unleashing the corporate beast by cutting taxes and revising regulations, but firms are not going to invest massively unless they see a reason to do that.
With consumers not having the money to allow stronger consumption and world growth remaining modest, the proposals coming out of Washington may not add to growth as much as many are expecting.
Still, the economy is moving forward at a decent pace and that is something to be happy about.
Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.
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