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Summer’s Economic “Soft Spot”

Summertime and the living is still not easy. Job growth has stumbled, consumer confidence has faded, and business expectations have eased. Clearly, the economy has hit a soft spot. Does that mean a double-dip recession is possible? Right now, that does not look likely.  Instead, if gasoline prices keep going down, we could see a rebound by the end of the summer.

The storm clouds have been gathering for quite some time. As gasoline prices moved upward in the spring, the economy — which had been on the cusp of moving from recovery to expansion — slowed. Is anyone really surprised that $4.00 a gallon would cause consumers lots of pain? I don’t think so. When you consider that each penny increase in gasoline costs reduces consumers’ spendable income by about $1 billion and there was a one dollar increase in just four months, pumping all that money into the gas tank rather than spending it on other things had to reduce economic activity. And it did.

How bad were things? Let’s start with job growth. During the first four months of the year, private sector payroll gains averaged over 200,000 per month. In May, firms hired only 83,000 more workers. In addition, the unemployment rate rose back over 9% after having declined to 8.8% in March. So, should we be concerned? Not just yet. Payrolls changes are always very volatile and the economy is still adding workers. As for the unemployment rate, it had fallen by one percentage point in just four months, a rate of decline that was way too fast given the modest pace of economic growth. Payroll and unemployment rate changes that bounce around are nothing new, so let’s wait a few more months so we can really see where things are going.

There was also a sharp slowdown in the sales of cars and SUVs. Vehicle purchases in May were off 10% from the April pace. That might seem to be a major issue and there is some concern, but other factors may have been at work. The Japanese vehicle industry has not been operating fully since the tsunami and the nuclear crisis, affecting the supply of vehicles. And retail sales have not been that bad. Consumers are buying things, but without the extra cash that is going into gasoline tanks instead, they are spending more conservatively.

Looking forward, it is still all about gasoline. High prices slowed economic growth and lower costs could reignite the expansion. Gas prices are down 25 cents in the past month, and with crude oil prices continuing to decline, we should expect further cost reductions. Another 25 cents would retrace half the rise and allow households to start spending again. That would provide businesses with the confidence to start hiring more workers, raising consumer confidence and getting the expansion back on track. That is likely to occur as we move through the summer. In other words, the soft spot should firm and by the fall, look for growth to get back to solid ground.

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Posted in Industry News.

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