The Independent Market Observer

Is U.S. Economic Growth Headed for a Slowdown?

Posted by Brad McMillan, CFA®, CFP®

Find me on:

This entry was posted on Jul 15, 2015 2:53:00 PM

and tagged Commentary

Leave a comment

U.S. economic growthBased on the retail sales data that came out yesterday, it’s time to take a serious look at the prospect that U.S. economic growth is slowing down.

I’m not suggesting that we’re moving back into a recession—just that growth is quite possibly slowing below expectations, and an acceleration may not be coming any time soon. We need to consider why that might be.

Retail sales disappoint

First, let’s consider the retail sales number, which dropped 0.3 percent in June, coming in well below the previous month’s very positive figure. In part, this is normal and expected after a strong month, but the magnitude of the drop was worrying, falling far short of expectations; worse, the prior month was revised down as well.

Retail sales are important because they offer a look into consumer thinking—and consumers are more than two-thirds of the economy. Given lower gas prices and wage income growth around 4 percent–5 percent, the expectation was that people would go out and spend. That doesn’t seem to be happening.

Why? There are two plausible reasons: a rise in uncertainty, and a decline in income growth.  

Uncertainty cuts into spending

As the chart below shows, rising economic uncertainty tends to negatively affect consumer spending, with about a one-year lag. The relationship is not direct, but it is material.

 U.S._economic_growth_1

The recent uptick in economic uncertainty—which is based on unexpected changes in policy and conditions, such as the Greek crisis—suggests that consumer spending will slow down, which is just what we’re seeing. The numbers indicate this effect will get worse through the rest of the year.

Wage growth still lagging

As you can see in the chart below, wage income had been rising at a healthy pace, but the recent trend is down. At the margin, this has restricted consumer spending growth as well.

 U.S._economic_growth_2

Looking forward, the news for wage income growth isn’t as bad as for uncertainty, but it’s not particularly good either. Jobs should continue to grow, but hours per week are already high and unlikely to increase substantially. What needs to happen here is more wage growth, which we’re not seeing yet.

I’ve been saying for some time that wage growth should increase in the near future, and it still should. But if it doesn’t, we’ll need to revisit our expectations. Continued weakness in both wage growth and spending means that point is getting closer.

Where we are now

Let’s be clear: the recovery continues. Economic growth at around 2 percent–2.5 percent isn’t great, but it can continue at this level for a long time by avoiding overheating. Current growth levels look sustainable, and there’s no internal reason that the recovery should end. In fact, with all the turbulence outside the U.S., the fact that the economy continues to grow is a positive sign.

As far as growth goes, slower for longer isn’t what everyone is expecting, but it looks like an increasingly possible option. This has its pros and cons—slower growth means slower increases in living standards but lowers the possibility of recession, for example—but it’s positive overall.

Much of the commentary on the economy recently has suggested that slow is bad, but there’s a big difference between bad and “could be better.” Given a choice, I’ll take “could be better.”

                      Subscribe to the Independent Market Observer            

Subscribe via Email

Crash-Test Investing

Hot Topics



New Call-to-action

Conversations

Archives

see all

Subscribe


Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly in an index.

The MSCI EAFE (Europe, Australia, Far East) Index is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.

One basis point (bp) is equal to 1/100th of 1 percent, or 0.01 percent.

The VIX (CBOE Volatility Index) measures the market’s expectation of 30-day volatility across a wide range of S&P 500 options.

The forward price-to-earnings (P/E) ratio divides the current share price of the index by its estimated future earnings.

Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided on these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®