Rise in Consumer Spending Signals GDP Growth Ahead

Economic Forecasts

Rise in Consumer Spending Signals GDP Growth Ahead

Modest, but solid, gains in consumer spending suggest that a double dip recession isn’t likely, despite the downgrading of the second quarter’s growth rate from 2.4% to a mere 1.6%. The pleasant surprise is an upward revision in growth in consumer spending to 2% (revised from 1.6%), indicating that consumers aren’t as tightfisted as first thought. This gives credence to the idea that spending will continue to pick up in the coming months. In the second quarter, consumer spending, which accounts for 70% of gross domestic product, rose for a wide range of services, including health care, restaurants and financial services.

We look for GDP to post a gain of 2.8% this year and a bit over 3% in 2011. That’s subpar for a recovery period but much improved over the 2009 decline of 2.6%. After a rousing 2009 fourth quarter (5% annualized growth) and first quarter of this year (3.7% annualized growth), sluggish economic growth has been disappointing, raising fears that the economy will again tumble into recession.

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While data on the economy during July show a weak start to the quarter, especially in housing and business investment, several causes of the slowdown are dissipating. These include the bust from the expiration of the tax credit for home buyers and high anxiety about Europe’s financial woes. Moreover, there are good reasons to think there should be improvement in the fall:

* Rock-bottom interest rates and a fiscal policy that remains stimulative.


* The likelihood that businesses that are sitting on a pile of cash will decide to maintain purchases of equipment, software and information technology. Business spending on software and equipment shot up 25% in the second quarter, the strongest quarterly gain since 1983.

* Banks with plenty of capital to lend, once the spigots are loosened.

* An improved pace of consumer spending as more jobs are created.

* A housing sector that, though it remains in the dumps, won’t subtract from growth.

* And exports benefiting from global growth.