11/7/13 – Economy Showed Signs of Slowing Last Quarter

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Nov 7, 2013 9:28:10 AM

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Today’s news included a stronger-than-expected growth figure for the U.S. economy, which expanded 2.8 percent in the third quarter. Before we get too excited, though, we have to note that the increase came from inventory buildup—not exactly a sustainable growth engine. In fact, you can argue that the reason inventories increase is because sales are less than expected. If you take away the inventory effect and net foreign trade, you end up with a 1.7-percent growth rate for sales to domestic purchasers for the quarter, down from 2.1 percent in the previous quarter, which supports this argument.

Unfortunately, other data points confirm a slowdown last quarter. Personal consumption grew more slowly, at 1.5 percent (down from 1.8 percent the previous quarter), while business investment dropped from a growth rate of 4.7 percent to 1.4 percent.

A decline in consumer confidence appears to be a primary culprit here, with today’s Bloomberg Consumer Comfort Index down again, albeit by less than previous weeks. I suspect the effects of the government shutdown are lingering, although they are being dispelled over time, and this is depressing both consumer and business demand.

One factor that is acting to make consumers more confident is the slowly improving employment stats. Today’s initial unemployment claims figure—that is, the number of new people applying for unemployment insurance—was down to 336,000, a small decrease from the previous week. This number spiked during the shutdown and has since been slowly declining again, but it remains above last month’s levels. The cause of the initial spike was unclear, due to data uncertainty related to the shutdown, but the subsequent slow decline suggests that the layoffs were real and that they’re only slowly being reversed.

Not everything is bleak. For employment, the year-on-year results from the Challenger Job Cuts Survey are actually down 4.2 percent, showing we’ve made real progress over the past year, despite the current short-term slowdown. The Institute for Supply Management business surveys, known as the ISM, showed surprising strength, with the manufacturing survey rising to a two-and-a-half-year high, well above expectations, and the nonmanufacturing survey also coming in above expectations. Based on these measures, business—particularly manufacturing—survived the shutdown quite well, thank you, and is continuing to expand.

The other positive factor moving forward is the growing ability, and intention, of state and local governments to pick up spending and hiring. Government actually moved from being a growth detractor to positive growth last quarter, which prevented the slowdown from being even worse, and that is expected to continue.

Between the strong business surveys, the continued recovery in government spending and hiring, and the slow recovery in employment, the slowdown should fade over the next month or two, and the effects on growth this quarter should be limited.

The more interesting effect will be on the Federal Reserve’s decision regarding whether to taper the current quantitative easing program. Given the pronounced bias toward maintaining the stimulus until there are unmistakable signs of recovery in employment, I suspect the slowing will be used as further ammunition by those who want to postpone the taper. Therefore, the chances of a taper toward the end of the year are, I think, even lower now than they were before. Even as I expect employment and growth to continue to recover, I doubt they will do enough to meet the Fed’s standards for recovery.

Now, a word about the National Conference: I really enjoyed Guy Kawasaki’s talk yesterday about innovation and his experiences at Apple and elsewhere. He’s a great speaker and someone who has really walked the path he talks. I say this all the more since he once turned down a company of mine for funding—which, in retrospect, was a wise decision.

Although I single out this presentation, there are many others that are just as good. What a great opportunity to hear directly from so many experts in so many fields! I’m very lucky to be here.

Have a good day!

Upcoming Appearances

Tune in to Bloomberg Radio's Bloomberg Businessweek on Friday, February 28, at 3:45 P.M. ET to hear Brad talk about the market. Stream the show live at https://www.bloombergradio.com/, listen through SiriusXM 119, or download Bloomberg's app, Bloomberg Radio+.

Tune into Yahoo Finance's The Final Round on Thursday, March 12, between 2:50 and 4:00 P.M. ET to hear Brad talk about the market. Exact interview time will be updated once confirmed. Watch at finance.yahoo.com

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