The government dispensed the third and final update on third-quarter GDP this morning, and no one who routinely reads such things will be shocked by the numbers. The annualized quarterly real 2% pace of economic growth for July through September was a bit slower than previously estimated, although it’s in line with the latest consensus guess from the dismal scientists.
The government’s former estimate for GDP was a tad higher at 2.2%. More importantly, the final 2.0% rate in the third quarter is below the 2.6% rise logged in the second quarter. The economy, in sum, is still slowing. Everyone knew that, of course. So, now what?
Divining the future based on looking at the past is like trying to cut your lawn while watching your neighbor wash his car. Yes, it can be done, but you may miss a few spots and cut off your foot in the process. Nonetheless, we cautiously reviewed the data and came to the not-terribly insightful conclusion that there’s still reason to worry about 2007. No, we’re not consumed with fear, but we’re sleeping with one eye open. For those who want a bit more detail, read on, and we’ll try not to cut off our foot as we explain.
Let’s start by observing that personal consumption expenditures form the engine that keeps the economy humming. PCEs represent about 70% of GDP, which reminds once again that Joe Sixpack and his colleagues are collectively running the show. Within the PCEs column, services spending is the largest chunk, running at roughly 56% of total PCEs in the third quarter, followed by nonndurable goods purchases (29%) and nondurable goods purchases (15%), based on chained 2000 dollars measured at seasonally adjusted rates.
In other words, keeping an eye on Joe Sixpack’s spending notions starts with looking at services. As such, alarmists will note that services spending advanced by 2.8% in the third quarter at a seasonally adjusted annual rate. That’s down from 3.7% in the second quarter. But before we read too much into that, remember that the third-quarter pace of services spending was also higher than in this year’s first quarter. Let’s sum it up by saying that services spending was middling during July through September compared to what came earlier in the year. What’s more, since much of services spending is tied to recurring household items such as electricity and medical care, Joe doesn’t have a lot of choice here.
Ditto for nondurable goods spending, the second-largest component of PCEs. Nondurables include such items food, gasoline and clothes purchases. While we’re on the subject, nondurables spending increased at a slightly faster pace than in the second quarter, although the rate of change was notably slower than in the first and second quarter. Something to watch, but the trend at least is slightly encouraging of late.
That leaves us with durable goods purchases, the last of the three major components of PCEs. Although it’s the smallest of the three in terms of dollars spent, it’s the most volatile because Joe has what economists call discretion here. Durable goods includes purchases of cars, computers, furniture and other items that can easily be delayed or increased when and if consumers are so inclined. Access to credit is the reason. No one need postpone instant gratification in the 21st century. Accordingly, an early warning of things to come may be found in trends in durable goods spending. With that intro, let’s go to the numbers:
Durable goods spending jumped 6.4% in the third quarter at a seasonally adjusted annual rate. That reverses the slight decline (-0.1%) posted in the second quarter but is still far below the first quarter’s 19.8% surge. What can we make of this? One thing that leaps out is the fact that the back-and-forth trend in durable goods spending this year is uncommon based on recent history. From the first quarter of 2003 through the third quarter of 2005, durable goods spending was continually positive, albeit in varying degrees. The persistently upward trend was broken starting in 2005’s fourth quarter.
All of which implies that consumers are becoming wary and are now willing to curtail spending. That’s something we haven’t seen until recently. We suspect that we’ll see more of it in 2007. Joe’s confidence isn’t what it used to be when it comes to pulling out the credit card. That doesn’t mean he’s about to give up going to the mall, although the durable goods spending numbers are telling us to be wary.