Deller's two cents: Surprisingly positive economic news this week. Consumer spending up and not on credit cards. Can't conclude based on this data, but it looks like people are starting to spend some of the savings they have accumulated over the past few years. Growth is still too modest to say we are out of the woods, but the odds of a new recession are shrinking.
Economic Week in Review: A turn for the better?
October 28, 2011
Signs of progress on Europe's sovereign debt crisis and solid, but unspectacular, GDP growth in the United States sounded hopeful notes in a week of otherwise mixed signals. The S&P 500 Index rose 3.8% to 1,285 (for a year-to-date total return-including price change plus dividends-of about 3.9%). The yield on the 10-year U.S. Treasury note increased 11 basis points to 2.34% (for a year-to-date decrease of 96 basis points).
GDP expands 2.5% in the third quarter
The government's initial estimate of overall economic activity-real gross domestic product (GDP)-rose at an annualized rate of 2.46% during the third quarter. GDP's solid, but not robust, growth seemed to have dispelled fears of another recession. Moreover, final sales-an indicator of the strength of domestic demand based on GDP minus inventories-rose at a 3.6% annualized rate, faster than in the previous two quarters. However, that pace was too slow to make a major dent in unemployment, analysts said.
Among the components of GDP, consumer spending grew at an annualized 2.4% after increasing only 0.7% in the second quarter, as the ripple effects of Japan's spring disasters faded and oil prices slid from their spike earlier in the year. Business investment was strong: Spending on equipment and software increased 17% and spending on structures grew 13%. Trade also contributed to growth.
"The GDP release contrasts with the downbeat sentiment and low consumer confidence numbers we've been seeing lately," said Roger Aliaga-Díaz, Vanguard senior economist. "Mostly temporary factors could be behind the strong spending numbers. For consumers, the extra spending came out of personal savings. For businesses, the expiration at the end of the year of the 100% depreciation expensing provision may be rushing some corporations to pull forward some of their future investment plans."
GDP: Under the hood
Real GDP (3Q 2011) +2.46%
Contributions of major components
Consumer spending 1.72%
Business spending 0.52%
Trade (exports minus imports) 0.22%
Federal, state, and local government spending 0.00%
(Get a closer look at GDP and its components.)<https://personal.vanguard.com/us/insights/article/GDP-09092011>
Consumers are spending more even as they earn less
Consumer spending was unexpectedly strong in September. Consumption rose 0.6% while personal income edged higher by only 0.1%. Personal savings in September declined to an annualized rate of 3.6%, the lowest reading since 2007 and the third straight monthly decline from June's 5.3% rate. Looking into some of the details: Spending growth (which has averaged 0.6% over the past three months) was led by purchases of durable goods, including a rebound in auto sales. Healthy growth in the wages and salaries component of personal income was offset by lower interest income and flat government benefits.
Consumer confidence falls to recession's level
Consumer confidence fell in October to the lowest level since March 2009, during the recent recession. The Conference Board's index of consumer confidence fell to 39.8, rather than remaining flat as expected, bringing the three-month slide to 20 points. Especially worrisome to consumers were their assessment of business conditions and their income expectations. There was, however, a slight decrease-a good sign-in the "jobs hard to get" category.
New-home sales show surprising strength
Even as homebuyers trolled the large stock of distressed and discounted homes for bargains, sales of new homes posted a stronger-than-expected gain in September. Sales rose 5.7% to 313,000 units annualized-their first increase since April. Months' supply of unsold homes fell from 6.6 to 6.2, and inventories were flat. Nevertheless, the residential home market continued to struggle despite record-low mortgage rates. Sales fell 0.9% compared with a year earlier, and the gains were not broad-based.
Durable goods orders are better than you might think
New orders for durable manufactured goods declined 0.8% in September-yet analysts viewed the report as reassuring. The reasons: When the (expected) steep decline in volatile aircraft orders is excluded, durable goods orders rose 1.7%. And orders for nondefense goods excluding aircraft-an indicator of business spending strength-rose 2.4%.
Growth in employee compensation slows
The wages, salaries, and benefits paid to civilian employees grew 0.3% in the third quarter, half the expected pace and less than half the increase of the prior quarter. Wages and salaries (about 70% of compensation) increased 0.3% in September while benefits (30%) were virtually unchanged. Analysts said that the results reflected the continued soft labor market, which was particularly difficult for state and local government employees, who have been facing payroll cuts. On a year-ago basis, compensation grew by 2.0%, which also represented a slowdown compared with the 12-month results for prior quarters.
The economic week ahead
The Federal Open Market Committee holds a regular meeting on Wednesday, with economic-growth strategies likely high on the agenda. Other upcoming reports include construction spending and the manufacturing index produced by the Institute for Supply Management (ISM) on Monday; productivity, factory orders, and ISM's nonmanufacturing index on Thursday; and the unemployment rate and nonfarm payrolls on Friday.
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Steven C. Deller
Professor and Community Development Economist Department of Agricultural and Applied Economics
515 Taylor Hall --- 427 Lorch Street
University of Wisconsin-Madison/Extension Madison, WI 53706
608-263-6251
"I started out with nothing and I still have most of it left."
Seasick Steve
