The U.S. Economy: Slow Going

The financial markets have been ailing for more than a year but the economic troubles are only just beginning, as today's round of sobering economic updates reminds.

Perhaps the most damning evidence is the news that personal consumption expenditures (PCE) dropped by 1% last month: the biggest monthly fall since September 2001. The difference now is that the economic context is fundamentally and deeply negative whereas the tragic events of 9/11 were temporary and largely unrelated to the otherwise recovering trend. No such luck this time. We had an emerging economic tailwind when terror struck in 2001; today, there's only a headwind — a strong headwind and one that's likely to blow harder in the months ahead.

Nor can the sharp pullback in spending be blamed on income, which rose 0.3% last month, up from September's meager 0.1% gain. The chart above suggests that consumers are now committed to saving more and spending less. In one respect, that's encouraging. The savings rate in the U.S. has been falling for years, largely because consumption has taken wing. Those trends are now reversing, as they eventually would. In the short term, however, the implications are clearly negative for the economy, which is highly dependent on consumer spending to the tune of about 70%. As such, the sharp pullback in consumer spending hints that Q4 GDP will be materially worse than the Q3 pullback of -0.5%.

Corroboration for this dark outlook comes in today's update on new durable goods orders, which slumped by more than 6% — the biggest monthly decline in two years, and the third consecutive month of red ink. Virtually every measure of new orders shrunk, from machinery and fabricated metals to transportation and capital goods. No one, then, will be shocked to learn that the durable goods component for personal spending submerged by a heavy 4.0% last month.

All of this might be manageable if other areas of the economy were holding up. Again, we're out of luck. Notably, the real estate market continues to correct. New home sales were down again by a robust 5.3% last month. Expectations for a quick turnaround, or even treading water, still looks unlikely based on the ongoing decline in forward looking measures such as new housing starts and new building permits issued.

Unsurprisingly, the labor market is still bleeding as well. Last week's tally for initial jobless claims was again north of 500,000, a red zone that suggests that the workforce will continue to shrink for the foreseeable future.

As the economic pressures mount, so too do the government's efforts to ease the pain. Yesterday, the Federal Reserve announced yet another massive spending plan for supporting the economy. The immediate effect was a big drop in mortgage rates. The average 30-year fixed mortgage dropped to roughly 5.5% from 6.38% yesterday, according to Bloomberg News. Not bad for a day's work in the stimulus trenches. And the incoming Obama administration is prepared to hit the ground spending when the president-elect moves into the White House in January.

But stimulus — or, rather, the economic recovery program — isn't the magic pill it used to be. Even with all the current and future liquidity, Joe Sixpack isn't likely to take the bait, at least not just yet. One could argue he's been overstimulated one too many times in the past and so the charm's worn off. Eventually, the explosion of 0% financing offers and government rebate checks will change the negative sentiment, but not anytime soon, as the glum news on consumer sentiment warns.

The Reuters/University of Michigan Surveys of Consumers' index fell to a 28-year low this month. "Consumers were unanimous in their recognition that the economy was in recession, and nearly three-in-four expected the recession to deepen in the months ahead," the report said via Reuters.

When it comes to consumer spending, perception is reality. Yes, the government's efforts will help, but primarily by keeping a deep recession from turning into a catastrophe. A big part of the solution this time around is that the correction will have to run its course. First among equals on the victim list: the notion that the Great Moderation was something more than a passing phase.

Comments

[Smarty_Pants:]

Stay tuned. More disappointing statistical measurements coming to gub'mint reports in the near future.

You'd think with numbers like that we'd officially be in a recession by now.

2008 Nov 26 03:25 PM

[Prudent Man...:]

Slow economy - Great! Maybe Americans will rid themselves of their greed, avarice, entitlements and self-centered destructive behavior.

Today consumer spending was announced as down one percent. Seventy-five percent of that was the reduction in gasoline expenses.

Hear me: The worst of the economic recession is over (the NBER will announce we are in a recession, their usual one year late analysis - they did recognize the March-May 2000 recession in mid-2001) and the government programs will end up doing more damage than good. While the "smartest guys in the room" are talking about deflation (the same ignorant economic elitists that gave us fifty times leverage) while inflation is the next play.

2008 Nov 26 08:40 PM

[DollarTalk:]

I am very thankful for the blessings that I have in my life. Now, regarding the market, the power of optimism never ceases to amaze me. In fact, we are missing a very large component of our view on the market and the economy in larger view when we discount the role of perception. Most of this market volatility was brought on by increased uncertainty and the perception that our credit crisis and financial difficulties were beyond our ability to solve as a free market. This, of course, was exacerbated by the media and capitalized on by the media in order to accomplish the election of now President-elect Obama. Now, the media has their man and would do well to continue to promote positive, uplifting views on the future direction of the economy and the solutions and people proposed by President-elect Obama. Otherwise, they will find themselves in the company of the Republican party when the public develops a pessimistic or negative perception of the new President and his leadership team. That's all for now. More on my blog.

2008 Nov 27 01:54 AM

[Moon Kil Woong:]

As far as I'm concerned it's a good thing people aren't wasting more money than they make and any government act to try to get them to their old bad habit is poor judgement. A weaker economy based on solid long lasting fundamentals is exactly what the doctor ordered.

Government and consumers should stop eating sugar and take real medicine for once.

2008 Nov 27 04:46 AM

[Steven Hansen:]

i understand gasoline consumption is up. the consumer will also return to the poison well of credit. it is interesting to me to see how all of this will play out.

2008 Nov 27 07:29 PM

[ATWshop:]

Well done article that sticks to the Facts and not the Fiction being spewed about by many others. The author is not a pessimist but rather a person not afraid to look at the facts.
We have far too many reporters that only look for the facts that support their particular mind-set. Open minded articles are refreshing.
I fully agree with "consructe's" post above... we need a huge swing in the mind-set of Americans to change our poor savings habits and the coming hard times may start the ball rolling.
The bad news is that we will be saving our money with the Bankers and Brokers that are currently being bailed out due to their Greed or Stupidity.

2008 Nov 29 07:53 AM