The Consumer Grows Weary

The economy seems to be struggling along and you wonder if it might not be better for the thing to finally collapse than to torture us through this never-ending drip drip drip of stagnation. Economic data continues to have huge impacts on the movements of markets but for every ounce of good news, there is an equal if not greater amount of bad news.

Gross Domestic Product was revised upward to 3.3% from an expected 2.9%. Taken alone, that is not a bad level of growth for our economy. However, dissecting the parts reveals that the majority of that growth was driven by the growth in exports due to the weaker dollar, and the contraction in imports due to slower US demand for foreign goods. The overall impact of the export/import affect is estimated to be 3.1%. For those of you who don’t remember, GDP is made up of government spending, consumer spending, business investment, and exports minus imports. If the exports minus imports portion was 3.1%, the remaining drivers contributed a measly 0.2%. That is why it feels like we are in a recession even though the GDP numbers are coming in strong.

Consumer spending, which had been kept afloat by the federal stimulus package during the second quarter, seems to finally be weakening amidst higher unemployment and higher prices. In July, personal income declined by 0.7% from the prior month and consumption measured in real terms (accounting for inflation) fell by 0.4%. It looks like the consumer is starting to reach for the white towel. There is some hope however, in that consumer confidence had increased from prior month levels, but the index is still at recessionary levels and much of the improvement in confidence came from lower prices at the pump.

Even though the weak dollar should continue to benefit US exporters, the slowing growth in foreign markets will serve as a counterforce and should mute the affect of currency advantages. The real question looking forward to the rest of 2008 and into 2009 is how well the manufacturing sector holds up and how the consumer will react. The manufacturing sector has held up well as revealed by an unexpected rise in durable goods orders. Month over month, durable goods increased by 1.3% but a closer look shows that when adjusted for inflation, the increase was only 0.3%.

As for the consumer, the tax rebate impact is now gone and estimates are that only 30% of the rebates were spent. The rest of the money was used to either pay down debt or is being saved for a rainy day. With so many hurricanes swirling around, this may not be such a bad idea.

We should expect slower growth in Q3 and Q4 as issues continue to be shaken out and those less affected wait and see. There was a time not long ago when economists were insistent about the world economies ‘decoupling’ from the US. Either they were completely wrong or it just happens to be a coincidence that the world is now starting to slow considerably.