The big-picture economic news looks good, on the surface. But don’t be fooled. It’s not as robust as it looks.
Today’s release of the “advance” number for second-quarter GDP shows that the economy rose by a real annualized 1.9% pace in the three months through June. That’s up sharply from the 0.9% rate in Q1. Is it time to break out the champagne and declare the slowdown over? No, not even close. The correcting and cleansing process for the economy has only just begun.
Our reasoning starts with the observation that Q1’s 1.9% jump, while better than the previous number, is mediocre, at best, in the context of the last several years. More importantly, a closer look at the catalysts for Q2’s rise raises questions about the future.
A key contributor to the latest GDP rise comes from consumer spending, which rose 1.5% in Q2. That’s up from 0.9% previously. Good news, right? Yes, although one has to wonder how much of this is related to the stimulus checks that have been mailed out since May. Stimulus payments are a one-time boost and so they won’t be juicing the economy forever. When the charm wears off, consumers will be left to spend their own money. The question is: how optimistic will consumers be from here on out?
Meanwhile, take note that most of the rise in consumer spending in Q2 comes from increased purchases in nondurable goods while spending on cyclically sensitive durable goods dropped sharply. Not an encouraging sign. Indeed, the 3.0% decline in durable goods spending in the previous quarter follows the 4.3% drop in Q1. Back-to-back drops like this are rare for durable goods, and so the trend suggests more trouble on the consumer front.
Of course, one can look to exports as a bright spot once again. The 9.2% rise in exports in Q2 is a valuable offset to weakness elsewhere. But let’s not forget that much of the export gain in the previous quarter comes by way of a weaker dollar, which imposes costs on the economy that aren’t obvious in GDP reports. Indeed, there’s a limit to how much economic gain any nation can enjoy through a weakening of its currency. Devaluation may offer short-term benefits, but the U.S. can’t devalue its way to prosperity for very long.
Speaking of international trade, keep in mind that imports dropped sharply in Q2–down 6.6% for the quarter. That’s one of the biggest declines in years. The fall boosts top-line GDP and so statistically speaking the lower level of imports is a technical plus for economic growth. But make no mistake: imports are down because the economy is weak. Falling imports help raise GDP, but no one should assume that the trend is healthy.
What worries us even more is today’s weekly jobless claims update. Last week, new filings for unemployment benefits rose to 448,000, as our chart below shows. That’s the highest in five years (if we ignore the one-time spike from Hurricane Katrina in 2005). Alas, this trend seems to be building a head of steam, and the implications for consumer spending aren’t pretty.
Job destruction, in short, rolls on, or so it appears. We won’t know the broader details until tomorrow, when the July employment report is released. Based on today’s jobless claims numbers, however, we’ll continue to keep the champagne on ice for a bit longer.