Today’s revised estimate for third quarter GDP of 2.0% annualized was lower than anticipated, surprising economists and suggesting that the pickup in growth during the quarter was not as meaningful as previously believed.
The individual cylinders of economic growth told very different tales. While consumers contributed positively for the quarter, shrinkage in business inventories and government spending were both drags on the economy during the quarter.
Consumer spending has picked up in recent months, but it has come at the temporary expense of greater savings. While that strategy can allow households to address spending needs in the short-term, the longer-term need to save and reduce debt will at some point trump the desire to spend.
It will be difficult for consumers to continue to spend at this pace unless household income growth also improves. That prospect looks questionable at best given the high jobless rate and the mediocre pace of job creation. In short, the pickup isn’t sustainable unless the economy is able to demonstrate broad improvement that creates a virtuous cycle of better job creation and income growth.
Recent data has been relatively positive and holiday spending should keep consumers’ wallets open through the end of the year. The greater concern comes with the new year. At this point, the extension of the payroll tax cuts that have provided a boost to households remains in doubt. Consumer confidence remains low, and any negative developments that would further strain household budgets would undoubtedly weigh on spending and put the expansion at risk.
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