The US Commerce Department reported
this morning that Gross Domestic Product (GDP), the sum of all goods and
services produced within US borders, posted an annualized rate of 3.3%
for the quarter representing July-September.
To put this number into perspective, January-March posted a 5.5% rate,
while April-June posted a 1.8% rate.
The result on stock markets has been to drive up equity markets while
driving down the price of bonds. We would anticipate continued short
term upward movement in the equity markets.
OUR COMMENTS
Most economists and analysts had predicted a 2.0% rate for this latest
quarter, thus making these numbers an unexpected positive surprise for
the US economy.
However, one obvious fact that came out of this quarter's result is that
US consumers are leading the charge. Specifically, the trade deficit
continued to deteriorate as exports fell 2.9% and imports increased 3.4%.
This deterioration in the trade deficit reduced GDP by nearly a full
percentage point but was not as bad as previous quarters when the trade
deficit reduced GDP by more than 2%.
The factor responsible for increasing the GDP rate was quite simply,
consumer spending. Spending by individuals, which represents about 2/3
of the economy, grew to a healthy annual rate of 3.9% in this quarter.
Much of this can be attributed to the fact inflation hit a 35-year low of
0.8% on an annualized basis.
<bold><underline>However, to achieve that pace, consumers reduced their
savings to almost zero. Consumers saved just 0.1% of their after-tax
income in this quarter. This is the lowest savings rate ever recorded,
since the department began recording it in 1946.
</underline></bold><underline>
</underline>More importantly, the increased consumer spending did not
result in more spending for durable goods, which was virtually flat. The
fact is the majority of growth in consumer spending came from purchases
of services and non-durable goods such as food, fuel and clothing.
Finally, business and government were cautious in the third quarter.
With respect to business, overall spending on new equipment increased at
a minimal annualized rate of 1.1% - the smallest rate in seven years.
Meanwhile, spending on new buildings and structures fell at an annualized
rate of 6.5%, the biggest fall in 4.5 years. Government spending also
grew at a minimal annualized rate of 1.4%, compared to 3.7% in the
previous quarter.
CONCLUSION
On its face, this latest GDP number will be a boost to investors and
equity markets. However, the fact of the matter is that consumers are
the only sector leading this charge and they are doing so with little
regard to their future. Specifically, they are not saving any of their
money and what they are spending is going towards non-durable goods.
If and when the economy slows down, where are they going to find the
money to purchase that much needed refrigerator, dishwasher, washer,
dryer, lawn mower etc.? Had they been spending all their savings on
necessary durable goods, rather than discretionary restaurants, new
designer clothes and services, their financial position would have been
much more secure. As it now stands, a consumer with no savings and a
closet full of Giorgio Armani is a perilous one.
As such, we are taking our cue from business and government. Despite the
fact inflation is at a 35-year low, they have been reducing their
spending. Makes you wonder why?
Have a great day.
Regards,
Agora
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