No Recession, At Least For Now
By Scott J. Brown
October 17, 2011
Later this month, the government will release the advance estimate of 3Q11 GDP growth. There are uncertainties in that estimate – inventories and foreign trade make up a relatively small part of the economy, but account for much of the quarterly variation in GDP growth. We already have a good idea regarding the “meat and potatoes” of that report. Consumer spending and business fixed investment expanded further in the third quarter, suggesting no recession in the near term. However, the economic outlook for 2012 is a lot less clear.
The retail sales figures for September were stronger than expected, while figures for July and August were revised higher, spending economists back to their computers to re-calculate forecasts of 3Q11 GDP growth (now seen closer to 2% than to 1%). Consumer spending accounts for 70% of the overall economy. The recent data continue to suggest that the recovery in spending remains on track, although gradual and with a lot of ground to make up.
It seems likely that higher gasoline prices were the major factor slowing consumer spending in the late spring and early summer. Disposable income improved considerably in the first half of the year, boosted by the reduction in payroll taxes at the beginning of the year. However, disposable income rose much less after adjusting for inflation. That weakness in real income growth meant little fuel for consumer spending growth into the early summer. Gasoline prices have come down, but not by a lot (compared to where they were a year ago). Gasoline prices will be a major factor in the consumer outlook for early 2012.
The bigger uncertainty right now is fiscal policy. The cut in payroll taxes, agreed to last December, lasts until the end of this year. The president has proposed an extension and expansion of payroll tax reductions for 2012 as part of his jobs package. That proposal appears to be dying on Capitol Hill. However, some portions are likely to survive. Next year is, after all, an election year, and Congress risks the wrath of the voting public if no action is taken on jobs. Still, that leaves us with a key uncertainty for the consumer outlook in 2012.
Corporate profits, a key driver of capital spending, have remained strong, suggesting that business fixed investment will continue to expand into early 2012. Business spending on equipment and software has recovered from the downturn and appears to have risen further in 3Q11.
Recent data have helped reduce fears that the U.S. economy is already in a recession. However, there is still a lot of uncertainty about next year. Some of that uncertainty (gasoline prices) is beyond our control, but much is about policy – both fiscal policy in the U.S. and efforts to right the ship in Europe. The outlook for growth in the remainder of this year appears a bit brighter than it did a couple of weeks ago. However, the 2012 economic outlook is still troublesome.