Economy Healthier than Expected

There are a number of economic reports due out this week that should point to the health of the U.S. economy.

U.S. economic growth slowed in the fourth quarter, but not as sharply as previously estimated, with the gross domestic product showing an increase of 1.4% annual rate instead of the previously reported 1% pace, the Commerce Department said on Friday in its third GDP estimate.

GDP Better than Expected

GDP growth was initially estimated to have risen just 0.7%. The economy grew at a rate of 2% in the third quarter and expanded 2.4% overall in 2015.

The GDP report did show, however, that corporate profits were falling for a second straight quarter as a strong dollar and cheap oil undercut multinational company earnings.

Manufacturing profits declined $139.2bn during the last quarter after decreasing by $4.1bn in the July-September period. Profits in the petroleum and coal products sector tumbled $124.3bn after rising $7bn in the third quarter. A plunge in crude oil prices of more than 60% from highs above $100 a barrel in June 2014 also had a negative impact on the profits of oilfield service firms.

Manufacturers and retailers are concerned with companies cutting back on investments and showing reduced profits, and some analysts fear that the economy is likely to show disappointing growth again in the first three months of 2016.

Jobs Indicate Growth

Others are more optimistic. The job market is a key factor in the country’s growth and as long as the U.S. keeps adding 200,000-plus new jobs a month, they say the danger of a recession is remote.

This month’s employment report, scheduled to be posted on Friday, will probably show that the U.S. added 210,000 jobs in March and that the country has averaged 213,000 new jobs a month in the past four years, including a searing 282,000 average since December.

The numbers will also point to the unemployment rate remaining at an eight-year low of 4.9% in March.

Income and Spending

As far as personal income and spending, the Commerce Department’s report scheduled for Monday afternoon is expected to show a small increase of 0.1 percent in both income and spending, in line with other subdued economic data reported recently. The fairly strong consumer spending offset the drag from businesses trying to cut stock levels.

In addition, there were big increases in both income and spending s in January, so some slowing should be anticipated. If, on the other hand, consumption proves healthier, it would indicate that there was overall economic growth in the first quarter, which comes to an end on Thursday.

Spending is also being supported by the tightening labor market, which is steadily lifting wages, and rising house prices. Petrol prices of about $2 a gallon (37p a liter) are also helping to underpin household spending.

With the dollar’s appreciation slowing since the start of the year and oil prices easing up somewhat, corporate profits should rise, helping to fortify job growth.

How Long Will it Last

The question remains, however, as to how long the pace of hiring can continue if corporate profits and investment remain weak?

Adjusted pretax profits fell 3.2% in 2015, the first decline since 2008 when the U.S. was in the middle of its worst downturn since the Great Depression more than 80 years ago. And investment rose just 2.8% last year after a 6.2% increase in 2014.

Some economists attribute the decline in profits to the falling fortunes of the energy sector while others point to the slowdown in other sectors as well. They point to increased consumer borrowing as an indication of the low possibility of a recession. The latest consumer credit report issued by Federal Reserve shows total consumer credit hit an all-time peak of $3.54 trillion in January, up 6.5% from a year ago.

Rather than over using their high interest credit cards, Americans are borrowing more to fund college education and to replace aging cars and trucks with zero-interest financing. They are also spending more on services such as travel or eating out, powering an increase in hiring at hotels and restaurants. Increased spending on leisure activities is typically seen when consumers are more confident about their job status and the overall economy.

The positive talk about the economy may be a signal that the central bank could consider an increase in interest rate as early as April.

Cina Coren
Cina Coren is a former Wall Street broker and financial advisor. She holds a Master's degree in Communications and spent many years writing for international news outlets and journalistic publications. Today, Cina spends most of her time writing internet articles and blogs, and reading various newspapers to stay on top of the news.