The Commerce Department reported last Wednesday, July 30th, that its second quarter preliminary (first of three estimates) Gross Domestic Product (GDP) figure was 4.0 percent. To be sure, an annual rate of economic expansion of 4.0 percent is excellent news, especially as the final calculation of first quarter GDP came in at – 2.1 percent. Yes, that’s a negative sign in front of that “2”.
That means that from first quarter 2014 to second quarter 2014, the economy improved by 6.1 percent. Is this possible? Yes. Is this probable? We’re skeptical. (Correction below).
Let’s take a deeper dive to find out. First, economists polled by Reuters forecasted a GPD rate for second quarter of 3 percent. Therefore, their data suggested a 25 percent slower rate of economic expansion, or 1 percent, than what was reported.
The largest contributor, about 2/3, to the GDP number is said to have been consumer spending, which increased by 2.5 percent. Most of this spending was on durable goods and some on services. Despite spending more, consumers were reported to have saved more, by 5.3 percent. This is up from 4.9 percent in the first quarter. Business investment (capital spending), government spending, investment in home building, inventories (especially inventories) are also said to have contributed to the increased GDP.
A day prior to the GDP release, The Conference Board reported that its Consumer Sentiment Index reached 90.9 in July, up from 86.4 in June, its highest increase in seven years and close to a euphoric number. Do you feel economic euphoria?
Both these reports suggest that consumers feel better about their current and future prospects and the economy is benefiting. Despite the job market improvements, where are most of the jobs being created? Many new jobs are part-time employment, not full-time employment. Most part-time jobs are in the service sector, and not the sectors for which workers typically need a college degree and their salaries are much lower. Finally, due to technological advancement, employers can use part-time workers more efficiently. Employers schedule them only during the most critical hours, requiring them to be on call when the need is in doubt. This makes it more difficult for part-time workers to hold two or more part-time jobs to generate enough income to support themselves and their families.
Additionally, food and energy is eating up more of worker’s incomes, leaving less on which to spend their stagnant wages. The Federal Reserve reported second quarter inflation, as a whole, was up 2.3 percent annually, and although wage growth is on the rise, it is not at or above 2.3 percent. Where is the extra money coming from? Curious, isn’t it?
With all these forces fighting the consumer/worker, what supports the second quarter economic expansion? The only conclusions we come up with are that consumer spending is occurring mostly by those that have been sitting on money for a while; the upper 5 percent, consumers are back on credit again or the data is skewed. In either case, the data, taken as a whole, doesn’t suggest brighter days ahead for Middle America. We will wait until the second and third revisions come through, but we have our doubts of the accuracy of this GDP number.
What are you personally experiencing? Are you making more and spending more?
Correction: We poorly stated our point above by saying the economy improved by 6.1 percent. The start of the second quarter set a new floor and from that floor the Commerce Department says the economy improved 4 percent. For such a drastic change in economic direction, both a catalyst and time are required. We don’t see a strong enough catalyst in the Q2 economic data and don’t believe one quarter was enough time to create such a significant change in economic direction that would not be apparent to everyday Americans.