GDP Rose Only 2% In 3Q, But Media Says That’s Great

Sunday, December 27th, 2015 @ 4:44PM

Gary D. Halbert

Between the Lines

Yet despite the small downward revision, some in the financial media hailed the final estimate of 3Q GDP as a healthy sign, at least as compared to most other economies around the world. REUTERS, one of the first to report on the latest GDP revision, opened with this line:

The U.S. economy grew at a fairly healthy clip in the third quarter as strong
consumer and business spending offset efforts by businesses to reduce an
inventory glut, underscoring its resilience despite a raft of headwinds.

The WALL STREET JOURNAL had a similarly positive slant on the latest GDP report:

The report highlighted the relative strength of the U.S. economy compared with overseas economies, as domestic demand remained firm but exports slowed…

Perhaps the latest downward revision to 3Q GDP was viewed as favorable since the 2.0% number was actually a little better than the 1.9% pre-report consensus. REUTERS continued:

While that was a sharp deceleration from the brisk 3.9% pace logged in the
April-June period, growth remained around the economy’s long-run potential.

So our “long-run” growth potential has now slipped to only 2%? That is apparently what the mainstream media want us to believe. That 3.9% spurt in the 2Q was just an aberration, apparently. They want us to accept that 2% is the “new-normal.”

The US economy grew at the rate of 2.3% in the first half of this year, including the 3.9% jump in the 2Q. Most forecasters expect GDP growth of only 1.5%-2.0% in the 4Q. If so, that will mean growth of just over 2% for the whole year, as compared to growth of 2.4% in 2014.

Image1.jpg

The good news in the latest GDP report for the 3Q was that consumer spending continued to grow at a 3% annual rate, the same as in the 2Q. Consumer spending makes up apprx. 70% of GDP each year.

Continued strong spending was offset by weaker inventory investment as businesses looked to trim overstocked shelves from the 2Q, and by weaker exports due to the strong US dollar. It should be noted, however, that slower inventory growth and weaker exports were only a small drag on the economy in the 3Q.

The question is, can consumer spending increase even more in the New Year? A breakout in consumer spending in the world’s largest economy could help spur growth in the face of slowing demand outside the US. Yet many consumers feel constrained due to modest wage growth and rapidly rising costs for essentials like shelter and medical care.

Much of the discretionary spending this year has been on big-ticket items like cars, homes and furniture. Yet with the Federal Reserve expected to gradually ramp-up short-term interest rates next year, these kinds of large purchases, usually paid for in installments, may become more expensive.

The bottom line is that a significant breakout in consumer spending does not look likely for 2016, and 2% growth in the economy may indeed be the new normal. Let’s hope not!

 

Posted by
Categories: Between the Lines

Comments are closed.