Economic Notes: An Economy on Thin Ice?
3/02/2010
By Patrick O'Keefe, Director of Economic Research, J.H. Cohn
Inconsistent, but generally sluggish, statistics for January have raised questions concerning the recovery’s sustainability. While the disparate data confirm an economy on thin ice, they are consistent with projections for slow growth in 2010.
Revised estimates of Gross Domestic Product (GDP) for 2009’s fourth quarter (Q-4) provide further insight into the economy’s recovery. (The revision was the second of three GDP estimates; the final revision is due on March 26.)
The Q-4 rebound was simultaneously more vibrant but less robust, on gains that were larger—but narrower—than initially estimated.
Almost two-thirds of the quarterly gain was due to a slowdown in inventory liquidation. Most of the rest reflected a modest increase (+1.2%) in consumer spending and business investments in equipment and software (+1.1%).
On net, the public sector exerted a drag on the general economy as state and local governments cut spending by more than the Federal government increased it.
With the impetus from inventory decumulation and government spending in the rear-view mirror, future expansion will depend on an acceleration in consumer spending and business investment. (Assuming no significant shifts in the balance of trade.)
Consumer spending rose for the fourth consecutive month in January, despite a slight decline in after-tax incomes. Incomes are down due to job cuts and stagnant wages. Average weekly earnings in January 2010 were up 0.5% from a year ago.
Adjusted for inflation, however, earnings were down 1.5% over the year. In other words, workers’ paychecks grew but their purchasing power shrank.
Households have made considerable progress in reducing their non-mortgage debt, but there is no indication that they are prepared to unleash their credit cards. Instead, the most recent Reuters-University of Michigan survey found some slippage in consumer confidence – particularly with respect to their personal finances.
In light of this, it is unlikely that households will continue to cut savings in order to increase spending. It is more likely that they will continue to save as they did in 2009 (about 4.3% of after-tax income) and adjust their spending accordingly. In sum, consumer spending will sustain, but not accelerate, the rate of recovery.
Business investment, on the other hand, should grow at an accelerating rate as inventories are replenished, worn-out equipment replaced, and outmoded software updated. Those gains will be partially offset, however, by a continuing decline in nonresidential construction as homebuilding wallows at low levels.
Private investment will add to growth, but its general impact is limited by its relative size. (It constitutes only about one-eighth of the economy.) Nevertheless, business investment should nudge the rate of recovery higher.
Although selected data may give the impression that the recovery is losing steam, the Chicago Federal Reserve Bank’s National Activity Index reached its highest level since July 2007, just prior to the credit crisis.
January’s reading, which is based on 85 economic indicators and is a relatively reliable “real-time” gauge of the economy’s direction, suggests that growth is accelerating and the pace is approaching its historical trend.
Perhaps the ice is getting thicker. But then, watching water freeze takes more patience than waiting for it to boil.
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The statements, opinions, and conclusions contained herein are based solely upon the author’s own studies, research, and personal experience. Neither J.H. Cohn LLP nor the author makes any representation or warranty as to the accuracy or completeness of this information. J.H. Cohn LLP and the author expressly disclaim any liability for any loss or damage which may be incurred, of any kind whatsoever, as a result of or arising from the use of any of the information contained herein or reliance on the accuracy or completeness of it.