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Roadblocks Continue to Stand in the Way of Economic Growth

The economy continues to expand and that it does is an amazing feat in itself.  OK, growth did slow in the spring but the pace was a bit faster than expected.  Whether conditions will stabilize or even improve or whether we are headed downward, though, remains uncertain. The roadblocks are daunting: the willingness to say anything but do nothing in Washington is sapping the confidence of business leaders and households alike; European financial leaders are also willing to claim they will do something big but as of yet the policies have not been specified; and Asia is slowing no matter what the Chinese “data” say.  We need to muddle through until early next year when hopefully some of the uncertainties will begin clearing up.

Yes, economic conditions did moderate during the spring.  GDP growth was only 1.5%, down from 2% in the first quarter.  The deceleration resulted largely from a slowdown in vehicle sales.  But that falloff may have been due to weather.  The warm winter allowed buyers to visit the lots and even see the vehicles that would have been under snow in other years.  February’s sales pace was the highest since the sales incentives were in place in 2009 and likely an aberration.

In contrast, households started purchasing services again.  This component constitutes nearly two-thirds of all consumption and about 45% of total GDP.  Obviously, if people are not buying services and they hadn’t been, strong growth is not going to be possible.  The decent increase in the spring holds out hope that coupled with improving vehicle sales consumption can accelerate.  Also, businesses are still spending on equipment and software.  Thus, the key sectors of the economy are still adding to growth.

Unfortunately, one major component of growth is not pulling its weight: the public sector — not just state and local but federal as well — continues to cut back.  And I thought Washington was filled with a bunch of big spenders.  What do I know?  Normally, public spending would rise, adding to rather than subtracting from activity.  Clearly, there is no such thing as a free budget cut.

Looking forward, the outlook is mixed.  The key will be income growth, which must improve if consumers will spend more.  Businesses have little reason to raise wages.  The high unemployment rate means labor has little bargaining power.  So any additional compensation will have to come from more people working.  At least in July, that occurred.  The 163,000 increase in payrolls was a pleasant surprise, especially since the gains were widespread.

Critically, moderating unemployment claims, rising job openings and improving employment trends indices all indicate that the July gain can be duplicated in the months ahead.  However, we really need to get monthly payroll increases above 200,000 if the unemployment rate, which ticked up to 8.3% in July, is to decline consistently.  That does not seem likely.

The outlook for the remainder of this year is for more of the same.  The risk of falling off the fiscal cliff — which would occur if there is no agreement on taxes and spending before the end of the year — will likely keep businesses from aggressively hiring or investing.  It is incomprehensible that Congress would allow all the tax increases and spending cuts to come into existence, but we also cannot exclude that possibility.  If that happens, whatever momentum we have ending this year will come to a grinding halt.  I don’t think we will fall off the cliff, but I am not betting the ranch on that belief.

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Posted in Business Resources, Financial Education, In the Community, Industry News.

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