U.S. Consumers Muscle Through Q3 as Global Policy Spigots Open

  • When the going gets tough, the tough go shopping. And that appears to be happening in Q3, following a weak Q2. Second quarter real GDP growth registered a disappointing 1.7 percent annualized growth rate, matched by tepid consumer spending, which also increased at a 1.7 percent annual rate. Consumer spending accounted for 71 percent of U.S. GDP in Q2. With such a large portion of GDP driven by household purchasing decisions, there can be a temporary decoupling of U.S. economic activity from global trends.  That is what we are seeing as we close out Q3. U.S. consumers have picked up the pace of spending, and that will push up U.S. GDP growth in Q3 even as the recession in Europe deepens and Asia loses momentum.  Right now, job growth and real income generation is not driving U.S. consumer spending…deleveraged household balance sheets and pent-up demand is. Evidence is seen in retail sales which gained 0.8 percent in July, in unit auto sales, which increased to a 14.5 million unit pace in August, and in home sales, which are supporting price increases across most metropolitan areas in the U.S. Apple’s launch of the iPhone 5 in mid-September will give shoppers another reason to deploy the plastic, and is expected to result in a measurable boost to consumer spending in Q3 and Q4. Another positive to Q3 GDP may be better than expected trade data. The U.S. trade deficit for July was essentially unchanged from June, at $42.0 billion.  A negative will come from lower farm output and a drag to farm inventories due to the Midwest drought.
  • Today, the Federal Open Market Committee voted to launch a new program of bond purchases (quantitative easing) and to extend their forward guidance about the fed funds rate. The Fed will purchase additional agency mortgage-backed securities, at a pace of $40 billion per month. The Fed may continue these purchases until the outlook for the labor market improves substantially, meaning that there is now at least a broad unemployment rate target for QE3. The current program of extending the average maturities of Fed holdings (Operation Twist) will continue through the end of this year. The FOMC also voted to extend their forward guidance on the near-zero fed funds rate through at least mid-2015.
  • After increasing in July, payroll job growth in August fell closer to the weak Q2 average with a gain of just 96,000 for the month. The optics of the August jobs report were improved by a decline in the unemployment rate to 8.1 percent. However, the unemployment rate fell for the wrong reason in August as the labor force shrank by 368,000 workers. The drop in the labor force in August pulled down the overall labor force participation rate to 63.5 percent, the lowest percentage of working age adults participating in the labor force since the late 1970s.
  • On September 6th, the European Central Bank announced a new program of quantitative easing, boosting global equity markets. China has announced major new fiscal stimulus in the form of infrastructure projects, coming as Chinese trade data point to downside risk to the consensus “soft landing” outlook for China GDP. The policy spigots are opening worldwide as the drag from cooler global demand is increasingly visible.

Click here for the complete September 2012 Comerica Economic Update, including charts of economic activity and an updated macroeconomic forecast:  USEconomicUpdate0912.


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