Tags: economy | growth | us | fed

There Are Few Reasons to Expect Strong Growth Anytime Soon

Friday, 27 Jul 2012 11:50 AM

INDICATOR: Second-Quarter GDP Growth

KEY DATA: GDP: Up 1.5 percent; Consumption: Up 1.5 percent; Government: Down 1.4 percent

IN A NUTSHELL: “The economy just keeps slogging along with few reasons to think that strong growth is likely anytime soon.”

WHAT IT MEANS: I have been billed as the last of the bullish economists. I thought that the economy would have expanded more than the minimal growth rate that was the consensus. However, growth was about as soft as most other economists feared. A slowdown in consumer spending caused by moderating vehicle sales was one of the major reasons that growth eased from a slightly upward-revised 2 percent pace in the first quarter. We will learn next week what July vehicle sales were and that may go a long way in determining what third-quarter growth comes in at.

Meanwhile, there was some good news on the consumer front as services spending picked up. I have been focusing on this area since it is two-thirds of consumer spending and it had been doing nothing for the previous six months. If services purchases are improving, that could help. On the business side, it was good to see that companies are still buying equipment and software. Unfortunately, they are not doing any expanding as spending on new structures slowed dramatically. Additions to inventories, which added to growth, may not be good news if the stockpiling was unintended because of the weak economic growth. Firms may draw down those inventories in the current quarter.

On the other hand, the recovering housing sector continues to post solid — although slightly slower — growth rates. The weakening world economy is expected to act as another obstacle to growth.

Although the trade deficit widened more than I expected, it wasn’t due to slowing exports. They actually grew faster. However, we imported a lot more, causing cash to flow out of the country.

Finally, there is the public sector. State and local governments continue to cut back, reminding us that there is no such thing as a free budget cut. Also, the federal government reduced its outlays. I know everyone thinks Washington is spending like crazy but for the sixth time in seven quarters, the federal government actually reduced demand and caused growth to slow. Inflation moderated, helped by a major easing in consumer-goods price increases.

MARKETS AND FED POLICY IMPLICATIONS: This was a disappointing report but hardly unexpected. The economy is facing too many headwinds to pick up much speed. Does this report provide us with any hope that third-quarter growth will be better? Yes, but not necessarily strong.

It is likely that consumer spending will bounce back as vehicle demand accelerated in June and is likely to continue to improve. However, inventories could be drawn down to bring them more in line with expected growth. The looming "fiscal cliff" also will likely keep businesses cautious about investment spending. The trade deficit is likely to widen as exports slow.

So looking ahead, we could see growth rise back to — if not above — 2 percent but not a whole lot more unless the government sector starts to pick up the spending pace.

Meanwhile, when you beat limited expectations, it is good news and this report is likely to be received as such. As for the Federal Reserve, 1.5 percent growth is neither fish nor fowl. It is not too slow to force any additional action but clearly not strong enough to take further moves off the table.

The Fed meets next Tuesday and Wednesday and they will not have the July jobs report, which will be released on Friday. So, look for them to punt.

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2012-50-27
Friday, 27 Jul 2012 11:50 AM
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