I didn't realize that I would be forced to write about another depressing economic report. After discussing yesterday, how the gross tax receipts continue to decline due to continued drop in average income of Americans, there is more data this morning to support that American consumers continue to struggle as I had argued in my article on Impact of offshoring on American economy. Here is what the GDP chart looks like:
If we take out the 3Q03 data (which saw a jump due to increase in government spending due to Operation Iraqi Freedom), we are still looking at an improvement since the dismal numbers from 2001 and 2002, but nothing like the 90s and simply not enough to generate a robust growth in economy and jobs. Here are some additional conclusions from the Department of Commerce data:
- The deceleration in real GDP growth in the second quarter primarily reflected a sharp deceleration in personal consumption expenditures and a deceleration in private inventory investment that were partly offset by accelerations in exports and in residential fixed investment.
- Final sales of computers contributed 0.04 percentage point to the second-quarter change in real GDP, while motor vehicle output subtracted 1 percentage points from the second-quarter change in real GDP after contributing 0.30 percentage point to the first-quarter change (exactly as I had predicted).
- Durable goods purchases decreased 2.5 percent. Non-durable goods decreased 0.1 percent.
What does it all mean for businesses?
While you must read my previous analysis as well, here are some additional thoughts:
- What happens to interest rates is absolutely critical to how consumers will spend in the coming quarters. If the Fed raises interests more aggressively, it will hurt the consumers who will need to pay higher mortgages, further reducing their disposable incomes.
- Residential fixed investment continues to grow, meaning that consumers are spending on housing (through purchases, remodeling, etc.). This is good for businesses tied to the construction sector.
- Equipment and software showed improvements, an indication that businesses are now starting to upgrade IT infrastructure.
- We have seen improvement in employment numbers but we still have a long way to go. In addition to that, according to a Federal Reserve study, U.S. economy is now adding high-paying and low-paying positions in near-equal measure, after a period in which most of the jobs were in low-paying sectors like restaurants and retail.