Before the market opened on Thursday, another set of third quarter GDP numbers were out showing the economy grew at a less than spectacular 2.0%. We have tended to look at these numbers on a “gross” basis because it seems to point out the real activity in the economy. When we say “gross” we mean Before inflation. (To us, the inflation rate is difficult to measure so we like to take it out of play.)
The 2.0% GDP growth rate is associated with a 2.2% inflation rate so the actual increase is more like 4.2%. In the second quarter the growth rate was 2.6% but with a 2.7% inflation factor that figure is more like a 5.3% growth rate. In first quarter the net GDP was 5.6% so you can see there is a slowing in the economy.
Meanwhile, the savings rate has been negative for 19 months which means that people are spending more than their after tax earnings. On Friday morning we will probably see another negative savings rate when personal income and spending are announced. Personal income is expected to grow 0.4% but personal spending is expected to grow more at 0.5%.
The other head scratcher in all of this is the massive amount of money the government is spending, a lot of which is “off-budget” for the war. In this time of negative personal savings, the government is also in a Negative savings mode, too. And, the GDP is only growing at 2%. Can any of you explain this?
This is the basis for the possibility of a consumer led recession. If the consumer figures out that the credit is running out, then they have to slow down their spending. Over the past few years we have seen much extraction from the family ATM, the home they live in. That ATM is starting to go a little dry with rates edging up just a little and with home prices stabilizing or declining. With a GDP running at 2% annualized growth (that means the economy grew at about 0.5% in the third quarter), we don’t think it will take much consumer retrenching to lead to a serious decline in the GDP.
Back to the market action on Thursday, we saw a little fall off after the Philly Fed report indicated contraction in the business index for December. Expectations were for a number of 6 after November’s 5.1 but when the number came in at negative 4.3, the stock market took a little notice. Any number below 0 indicates contraction. Stocks fell for a while right after that report and didn’t recover much going into the close.
Since this is the last post before Christmas, we wanted to wish all of you a Merry Christmas. Hopefully, you can come back and visit us here next week. If not, we understand and invite you to join us after the first of the year. Our normal schedule of posting the evening before the market is open should remain through out the next ten days or so.
Dow Industrials: 12,421.25 -42.62