Economic Notes: Here Comes the Sun
5/06/2010
By Patrick O'Keefe, Director of Economic Research, J.H. Cohn
“Here comes the sun...”
~George Harrison
In the first quarter (Q-1) of 2010, the U.S. economy notched its third consecutive quarterly gain as real (i.e., inflation adjusted) Gross Domestic Product (GDP) rose by 3.2%.
Although the rate of recovery slowed, its composition broadened.
The most robust growth in personal consumption (+3.6%) in three years was bolstered by inventory replenishment and business investment. But the gain in GDP was constrained by a widening of the trade deficit as imports rose more rapidly than exports, and spending cuts by state and local governments.
The increase in consumer spending reflects steady improvement in personal income.
Since incomes bottomed last summer, however, consumer spending has increased twice as rapidly (+3.5%) as after-tax incomes (+1.7%). And savings have declined commensurately.
Therefore, unless disposable incomes increase at an accelerating rate, it is unlikely that consumer spending can continue to expand at Q-1’s pace. But after-tax incomes will rise only if there is a substantial and sustained increase in the number of jobs – which, as explained below, appears imminent.
Spending on services, which accounts for more than two-thirds of all jobs, has been increasing – at an accelerating rate – since early last summer. Similarly, the manufacturing sector, which employs about nine percent of all workers, has seen new orders increase in 11 of the past 12 months.
Supplementing those data are the results of the most recent survey of purchasing managers conducted by the Institute for Supply Management. In addition to growing optimism in both sectors, respondents indicate more ambitious plans to hire in the coming months.
The recovery’s missing piece, jobs, is at hand.
While there remain numerous economic challenges here and abroad, the U.S. economy’s near-term outlook continues to improve. After two stormy years, we can hum, if only softly, “here comes the sun.”
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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.