MAKING CENTS — Counting Down to Launch Time
The real gross domestic product (GDP) rose at a 3.9 percent annual rate in the government’s third estimate for second quarter 2015 (revised from 3.7 percent in the second estimate). In July, the U.S. Bureau of Economic Analysis introduced a new measure: real final sales to private domestic purchasers. This figure is simply GDP less the change in inventories, net exports and government a lessvolatile measure of underlying domestic demand. Private Domestic Final Sales rose at a 3.9 percent annual rate in the second quarter of 2015, up 3.5 percent from a year earlier. That’s strong!
One of the key themes in the U.S. economic outlook is the split between the rest of the world and what’s happening at home. Softer global growth and a strong dollar are likely to restrain exports and corporate earnings from abroad. However, falling oil prices and other commodities should continue to provide support for U.S. consumers and investors.
Inventories and foreign trade account for much of the quarter-to-quarter noise in GDP growth, and at this point we only have figures for July. However, we should see net exports and slower inventory growth subtracting from GDP growth in the third quarter of 2015, perhaps a very large drag on headline growth (which is another good reason to focus on Private Domestic Final Sales).
In September, Federal Reserve chair Janet Yellen downplayed concerns about the rest of the world and played up the prospects for the domestic economy, indicating that she was among the majority of Fed officials expecting to raise short-term interest rates this year. The stock market has often reacted poorly to the possibility of a Fed rate hike, however, this time investors seem to be encouraged by Yellen’s expressed confidence in the U.S. economy.
A CHANGE IN THE HOUSE
In what was considered a foregone conclusion, John Boehner announced his resignation as House Speaker effective at the end of October. The only surprise here is the timing. His decision was driven largely by disagreements with the Freedom Caucus (a group of ultra-conservative House Republicans) and Tea Party members.
Their dissatisfaction with Boehner was largely over his willingness to compromise. While John Boehner’s resignation as House Speaker may signal an agreement on the budget, Congress has moved further away from future compromise.
Boehner was blamed for Congress’ inability to overturn the Affordable Care Act. Two years ago, Boehner acquiesced to Tea Party demands to shut the government down. The 16-day shutdown in 2013 added several billion dollars to the government’s budget shortfall that year (government salaries are still paid, contracts have to be honored, and there are added costs to starting the government up again). It also shaved 0.1 to 0.2 percentage points from GDP since some private-sector output was lost. The 2013 shutdown also led to a delay of several economic data releases, distorting figures over the following few months.
Boehner’s resignation should significantly reduce the odds of a government shutdown over the budget. In fact, that was probably the trade-off (Boehner would work with House Democrats on the budget, but that would cost him his job). We will have to wait and see how Boehner’s resignation affects the likelihood that we’ll see a shutdown over raising the debt ceiling in early December.
Boehner’s replacement (the new House Speaker) will obviously be less willing to compromise, so looking ahead, Washington is expected to become even more dysfunctional than it is now, if indeed that is possible.
DÉJÀ VU ALL OVER AGAIN
It’s important to remember, though, that we’ve been through this before. If you recall, Congress took the Department of the Treasury to the brink of default in August 2011. Treasury bill rates briefly spiked higher. Standard & Poor’s downgraded the U.S. credit rating, but that did not have a lasting impact. In fact, Treasury bond yields fell rather than rose.
This time around, a government shutdown need not be unsettling for the U.S. economy, but it may add uncertainty for the financial markets. The debt ceiling is a much bigger problem than the budget, as it raises the possibility that the Treasury could miss a payment on its debt.
It is no mystery that the collapse in the oil price has forced job cuts in the oil extraction sector. Low oil prices, however, are helping consumers save extra money to spend elsewhere, thus retail spending and auto sales have been solidly positive.
It is a big mystery, however, that jobs in home building are not being added more aggressively. There is a housing shortage in many local markets, yet builders have been complaining of the difficulty of finding qualified construction workers, even though the pay is well over the minimum wage. Hmm. Sounds vaguely familiar.
THE NUMBERS SO FAR
Nonfarm payrolls rose at a disappointing pace in September and job gains for August were revised lower. The unemployment rate held steady at 5.1 percent. Average hourly earnings were flat for the month, while average weekly hours also fell to 34.5 from August’s 34.6 hours. The continued pace of job growth over the past several months has contributed to much stronger growth in consumer spending as reflected by August’s 0.4 percent rise in personal spending. August’s reading of personal income showed that income growth continued to accelerate. Combined with the low inflation environment, real disposable income rose 0.3 percent for the month.
Consumers continue to benefit from lower overall prices. The personal consumption expenditure deflator posted a flat reading in August with core prices rising just 0.1 percent. Core inflation now stands at just 1.3 percent on a year-over-year basis. With lower prices, stronger income growth and better job growth, it is not surprising that consumer confidence posted a sizable jump in September to 103.0 from August’s 101.5 reading.
But as I have said before, it matters less to me how consumers feel, but more how they spend their money. So far this year, spending has been mixed, depending greatly on weather patterns regionally and the shortage of product in certain plant categories
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