GDP may be growing but it does not feel that way to consumers
October 27, 2011
Earlier today, the Department of Commerce announced that U.S. Gross Domestic Product (GDP) rose by 2.5 percent in the third quarter.
While this number is not mind blowing in this economic climate, it is nearly double the 1.3 percent GDP growth we saw in the first quarter. What’s more, it represents the best GDP growth rate in a year.
This is a good sign but it should not even begin to suggest that happy days are here again. But it is better than it could have been…even if things still don’t feel good. That much is obvious, given high unemployment and cautious consumer spending.
Consumer spending, as we all well know, is the engine that drives the economy. That is somewhat problematic on varying levels, but it is worth pointing out that Commerce reported that consumer spending growth for the quarter rose to 2.4 percent. Another thing to note is that real disposable income fell 1.7 percent, representing its biggest decreased in two years.
Nigel Gault, Chief U.S. Economist at IHS Global Insight wrote in a research note that “with incomes down, consumer spending only accelerated because the savings rate dropped by a full percentage point. That’s not a solid foundation for growth.”
Nor is this: the weekly Bloomberg Consumer Comfort Index for the week ending October 23 fell, with the report’s authors saying that consumers were the most pessimistic about the state of the economy since the recession.
This index added that consumer attitudes regarding the state of the economy declined, with 95 percent of respondents having a negative outlook—marking the highest level since April 2009, coupled with consumers being more pessimistic about their personal finances.
On the non-consumer side, it is clear that businesses are doing what they can to help drive GDP, as evidenced by the 16.3 percent spike in business fixed investment for the quarter. At the same time, IHS Global Insight’s Gault notes that spending growth outpaced production, with inventories deducted 1.1 percentage points from growth, leading Gault to explain that there is no “excess” inventory to work off.
Interestingly enough, this alarming consumer-related data comes at a time when freight transportation and logistics services providers are reporting strong earnings. But, of course, this is not always directly linked to upticks in consumer demand. Oftentimes it has to do with effective yield management and pricing practices at a time when volumes are relatively flat.
Talking heads on TV and CEOs talking about earnings results may tell you that the economy is showing decent, albeit modest, signs of growth. But to many consumers it still does not feel that way, and it may not for a while.
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