Free Markets, Free People

GDP numbers up this quarter but is that permanent and significant?

Yeah, I know, boring economics again, but its important stuff.  This is where the crisis is and it is important to understand these stories as they come out.

The Washington Post trumpeted today that the Gross Domestic Product grew by 2.5% this past quarter.   Yes, that is a decent number.  But a) is it a number that will be revised upward or downward (because they’re always revised) and b) are there any clinkers out there we should be aware of, and finally c) is this the beginning of a trend or just a blip?

In answer to “a”, the “b” says down.  So let’s get to “b”:

Real disposable personal income fell 1.7%, the biggest drop since the third quarter of 2009, economist Nigel Gault of IHS of Global Insight notes. Even so, consumer spending jumped 2.4%, a big factor in the overall GDP growth. That means consumers boosted their spending by saving less. The savings rate fell a percentage point to 4.1%, Commerce Department data show.

That trend can’t last indefinitely, economists warn. Consumers eventually will tap out their savings or put the brakes on spending. “Consumer spending only accelerated because the saving rate dropped by a full percentage point,” Mr. Gault wrote. “That’s not a solid foundation for growth.”

Economists are already wondering whether a plunge in consumer confidence will eventually translate into lower consumer spending. October data from the Conference Board this week showed that Americans’ confidence in the economy is lower than at any point since the depths of the recession.

So the good news is that consumer spending most likely drove the GDP numbers up this past quarter.  However, it also appears, given the report, that it is unlikely that’s going to continue.  That is a huge drop in real disposable income and tapping savings isn’t something one would expect to be a long-term trend.  What we may have seen this quarter is consumer spending driven by the fact that a good percentage of consumers could hold out no longer on making some purchases.  Additionally, those out of work and tapping savings can’t do that forever.  

Which brings us to “c”.  Trend or blip?  Well, first my guess is the GDP will be revised downward.  And, seeing how that’s been the case with all previous quarters, I think that’s unfortunately a pretty safe bet.   And “c”?

Blip.

~McQ

Twitter: @McQandO

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