Credit Commentary

U.S. Economy close to Recovery?

By Zarana on Tuesday, November 03 2009

The American economy returned to growth during 2009's third quarter, a welcome departure from an extended period of painful economic contraction. While the return to growth is obviously a positive development, it does not suggest that problems with housing, declining consumer confidence, rising unemployment and continuing job losses are behind us.

The estimated 3.5% real (after inflation) annual growth pace was in line with expectations.  The data will be revised in late November, late December, and again whenever the number crunchers feel the urge.    
U.S. Real GDP

The 3.5% real annual growth pace during July to September compared to a 6.4% real annual rate of decline during 2009's first quarter and a 0.7% real annual rate of decline during the second quarter. The six-month swing from the first quarter decline was the largest six-month turnaround since 1980. The U.S. economy shrank 3.8% after inflation in the 12-months ended in June, the most painful decline since the Great Depression.

Overall consumer spending rose at a 3.4% annual rate, the strongest gain in nearly three years. No surprise, much of the growth was attributed to U.S. Government stimulus, including the Cash for Clunkers program and the $8,000 first-time homebuyer's credit.

Another harbinger of future U.S. economic growth was the ongoing decline in business inventories. GDP is a measure of what is produced, not what is sold.  Store shelves and warehouses are now so empty as to require additional manufacturing output in coming quarters.

Consumer Confidence

Not surprisingly, the recent recovery has been looked with skepticism by consumers, as indicated by the Conference Board’s consumer confidence index, which dropped from 53.4 to 47.7 in October. It was the index's lowest reading since mid-July, and puts the level in close proximity to its record low. The downbeat report raised a red flag over consumer spending in the fourth quarter, when retailers rely heavily on holiday sales.

Consumer Spending

U.S. consumer spending represented 71% of all U.S. economic activity during 2009's second quarter, the highest level since WWII.  The long-term average has seen consumer spending represent roughly 65% of all economic activity.

As one might expect, forecasts for consumer spending during the imminent Holiday Season are mixed. Forecasts range from roughly a 3% decline in spending this year versus 2008 to more optimistic views expecting a 2%-3% rise.

Stronger consumer spending now boosts current economic activity, but provides fewer assets down the road for retirement or funding a child's education.  Higher levels of savings now are good in the long-term, but detract from current economic activity.

However, Consumer spending is expected to rise modestly in coming quarters. But the stiff headwinds of high joblessness and weak employment prospects, soft income gains, and rising levels of consumer anxiety about more and more government, higher taxes, and damaging budget deficits will limit those gains.

Indicators to be watched in the coming weeks?

The employment report for October will be released Nov. 6. Unemployment hit 9.8% in September, the highest level since 1983. Economists believe the figure will exceed 10% and remain high well into 2010. In addition, President Barack Obama said that the US economy will continue to lose jobs in coming months despite exiting a recession, striking a cautious tone on unemployment

Future Prospects

The U.S. economy is not off to the races.  The economy is expected to maintain a modest growth pace during the fourth quarter, as well as during 2010 and 2011.  A key to sustainable growth will be how the private sector rebounds-consumers and businesses-with the government then (hopefully) reining in its enormous expansionist ambitions.