We Didn’t Spend Enough!

The verdict is in:   Q1 GDP growth was tepid.

And the lack of ‘consumer spending’ was a primary cause.

Why You Should Care:   Human behavior is impacted more by feeling and belief than concrete fact.  If GDP growth falls, approaches zero, or goes negative, many will adjust their behavior, take a more cautious stance, make different spending and investment choices, all of which could further exacerbate the problem.

Much like a snowball picks up size and speed rolling down a steep slope, so do negative economic events.   This is why we pay such close attention to consumer confidence and expectation.

Taking action:   Read on.   Get a good grasp of these concepts.

The BLOG:    In the first estimate by the BEA, real Q1 2017 GDP growth was a paltry 0.7%.   Even lower than I expected.   It may be adjusted up, when the BEA releases their second estimate on May 26th, but by any measure, this is a weak showing.

Looking closely at the numbers, its easy to see the culprit:   “Personal Consumption Expenditures,” or PCE for short, grew by only 0.3% for the quarter.   The biggest drag:  ‘Durable Goods’ which declined by 2.5%.  By my account, much of this decline can be attributed to weaker auto sales.   Which, historically, is not a good sign.  If it continues.

Ironically, while consumer spending (PCE) was only lukewarm at best, consumer attitudes are high as a kite!

Consumer sentiment and expectations are all higher than last month and a year ago.   Yet spending was down.

Said another way, in the aggregate it appears consumer action is not aligned with consumer beliefs.  Which is unusual.

And this dis-alignment suggests consumer spending – and thus the PCE – will likely swing higher in Q2.   Thus, I suspect this Q1 dip is only a short-term aberration.    I am not yet concerned that this weak showing is a harbinger of trouble ahead.    Not yet.

We’ll see.  🙂

• Terry Liebman