The underlying fundamentals are currently anemic, and we don’t see that changing through the end of the year. Overall, the economy is struggling to reach 2% growth, averaging about 1.7% over the first half of the year. Consumer spending is a bright spot and is holding up reasonably well, but investment spending has slowed. This is likely due to the ongoing European sovereign debt crisis and the impending fiscal cliff. US export performance appears to be faltering, and this is a key driver beyond the headline issues behind our opinion that the fourth quarter will be weak. That is not to discount the headline issues, particularly the fiscal cliff. If the lame duck Congress is unable to act on this it is quite possible the US will be pushed into recession in the first half of next year. Should Congress effectively address the fiscal cliff, we believe that the economy will perform well in 2013.
Delving into some numbers we see that real consumer spending grew at a rate of 1.5%. This is less than the 2.4% clip of the first quarter, but still a reasonable rate. We believe that this rate will move up in the fourth quarter due to holiday spending. What’s encouraging about the recent consumer spending numbers is where the money is being spent: motor vehicles and services. These two areas had previously been lagging, but are now ramping up. Last month, consumer bought the most cars since April 2008, excluding the brief effect of the “cash for clunkers” program. Last quarter, spending on services accounted for 60% of total consumption, and grew at a rate 2.1%. This compares to the first quarter’s rate of -2.2%.
If you’ll recall our emails of many moons ago we discussed how the economy was being carried up slowly by business spending. The consumer had severely curtailed spending and was focusing on paying down debt. We are now in the opposite position, with the consumer increasing spending and businesses pulling back. If we can get these two going at the same time our economy will be on a faster road to recovery. This brings us back around to the fiscal cliff. Businesses have pulled back spending due to the uncertainty surrounding this issue. Thus, it is imperative that Congress resolve this issue.
Next week we will be watching the ISM manufacturing report on Monday, the motor vehicle sales report on Tuesday, jobless claims and the FOMC minutes reports on Thursday, and the employment report on Friday.