By: Andrea Cohen
Last week the second estimate for third quarter Gross Domestic Product (GDP) growth in the US was published. For a good few months now, it seemed like the US was on the right track to recovery from the last recession. Housing market has shown strong signs of pick-up in activity (construction and financing) and the labor markets have mainly been beating consensus estimates almost consistently. It is now widely believed that the US economy has once again risen from the ashes and is on the right path to full-blown recovery. That is a particularly appealing story, in light of what’s going on in the rest of the world (especially in Europe).
The first estimate for Q3 GDP was +2.0% (over Q2). The street expected a read of +2.8% for the second estimate and almost got it when it came is at 2.7%, which is still quite encouraging. Yet, looking carefully at the composition of the data actually makes us more worried that encouraged.
Three very important components should be observed carefully and are the source of our concern:
1. CapEx. Capital Expenditures (permanent investments) are the number one driver of future growth. Without private investments in machinery, R&D, buildings, etc., future growth of sales and revenue is guaranteed to be mute. Even government intervention there is not sustainable.
This quarter, CapEx contributed close to nothing to GDP. In fact, going back to a survey published by the Philly Fed about investments intentions shows that managers are skeptical when it comes to investment decisions, as they have been through the entire latest recession.
2. Consumption. America’s economy is driven by personal consumption. With the Fiscal Cliff taxation debate in the background, there is no wonder that it hasn’t been picking up as fast and/or forcefully as some would want us to believe.
Consumption came in 0.5% below expectations for Q3 (compared to Q2) which is a horrid number. Missing expectations by that much means that too many on the street are not seeing something very important – that consumer sentiment is weak and consistent.
3. Government Expenditure. The problem with government expenditures is that decisions there are made by policy makers, not money makers and that the stream of cash flow is subject to too many political pressures and tax considerations and conditions. If history taught us anything, it’s that in order for an economy to thrive, government should play a smaller role in it rather than a larger one. Relying on government to fuel growth is dangerous.
Unfortunately, this GDP read is heavily supported by government expenditures and removing it from the calculations, we are left with a disappointing number.
Not only that but government expenditures are at a very volatile place these days, with the fiscal cliff looming around the corner.
We haven’t seen the last of Q3 GDP because numbers are not final yet. Q4 is problematic for predictions because Hurricane “Sandy” has had a significant effect on many businesses on the east coast and its full consequences are yet to be tallied.
Our point in this piece is that one should be very careful not to jump to believe that the US economy is in such a great shape. We would like to see a healthier composition of GDP and a longer track record of growth before we buy into that proposition.