Free Markets, Free People
I’m not sure how this is “unexpected, but it certainly isn’t good news around election time. Why? Because when consumer confidence dips, that means the likelihood of an increase in private consumption, something that would help the economy, isn’t at all high.
U.S. consumer confidence unexpectedly weakened in August to its lowest in nine months as Americans turned more pessimistic about the short-term outlook, according to a private sector report released on Tuesday.
According to the article, consumers are concerned about price increases and expecting inflation during the next 12 months. It was the lowest level since November. July was originally reported as 65.9.
“Consumers were more apprehensive about business and employment prospects, but more optimistic about their financial prospects despite rising inflation expectations,” said Lynn Franco, director of The Conference Board Consumer Research Center, in a statement.
But hey, don’t worry … be happy! Hope and change. Forward.
Yee haw …
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”?
There seems to be more and more evidence and economic consensus that a double dip recession may be about to occur, something we’ve been warning about for some time.
The outlook for economic growth in developed countries has got much worse in the last three months, the OECD said on Thursday and urged central banks to keep rates low and be ready to pursue other forms of easing.
The latest estimates marked a sharp slowdown from the Paris-based organization’s last forecasts in May but used different methodology so were hard to compare precisely.
The Organization for Economic Cooperation and Development forecast growth across the G7 group of major industrialized economies would average 1.6 percent on an annualized basis in the third quarter before slowing to just 0.2 percent in the final three months of the year.
"With respect to three months back the growth scenario looks much worse, one would say that growth is stagnating," said OECD chief economist Pier Carlo Padoan.
"We are witnessing a growth slowdown across OECD countries."
Not good. To put it in graphic form, check out this projection from OECD:
Those are not good numbers for growth. Now check out this particular graphic. One of the obvious keys to economic growth is consumers since they make up about 70% of the GDP numbers. What you’ll see is not something which inspires feelings of well being:
The title is an understatement. Consumer confidence, especially in the US, has tanked. In fact, if you look closely, it is slightly less than at the depth of the recession in 2009.
Again, not good.
Economies have a strong self-reinforcing nature. When people are optimistic, they spend, which begets hiring and then more spending. When people are anxious, they pull back, which leads to a cycle of hiring freezes and further anxiety that often lasts for months.
And history tells us:
The United States appears to have entered some version of the vicious cycle. Most ominously, job growth has slowed to a pace that typically signals the start of a recession .
Over the last 50 years, every time that job growth has been as meager as it has been over the last four months,the economy has been headed toward recession, in a recession or in the immediate aftermath of one. From early 2010 through this spring, by contrast, employment was growing fast enough to make the economy look as if it were in a recovery, albeit a modest one.
That’s not the case now.
More immediately, the main significance of the recent slowdown is that the economy may not merely be going through a weak phase that will soon pass, as many policy makers hope. Instead, history seems to suggest that the situation will probably get worse before it gets better.
In a recent research paper, Jeremy J. Nalewaik, a Federal Reserve economist, described this concept as “stall speed”: once the economy slows markedly, it often continues to do so. (He did not make a forecast.) In the other two severe downturns of the last 80 years—in the 1930s and the early 1980s—the economy suffered just such a stall and fell into a second recession not long after the first.
So the consensus opinion forming is we’re in big trouble economically:
“For the U.S, we now expect GDP growth in the second half of 2011 to average just 1.3 percent at an annual rate, down from 2.8 percent,” said HSBC Chief US Economist Kevin Logan in a research note.
“Don’t be fooled by an autos recovery in the third quarter,” said Logan Jonathan Loynes, the chief European economist at Capital Economics, feels similarly about Europe.
“The latest activity indicators suggest that the euro-zone economy might soon slip back into recession.
In the second quarter, the economy expanded by just 0.2 percent, compared to 0.8 percent in the first quarter of 2011,” said Loynes.
“Growth this weak means the economy will likely remain on recession watch throughout the remainder of this year,” Logan said of the U.S. He believes the key risk is stagnating consumer spending.
On the economic side of things, this is not something anyone wants to see, but the metrics are lining up to indicate that a double dip is what we’re going to see. On the political side of things, if that’s the case, it spells big trouble for the incumbent president.
There’s your economic setting for the big Presidential jobs speech tonight.