It All Comes Down To The Almighty Consumer:
Consumer spending remained the big prop holding up Q1 GDP, according to the first estimate. The BEA stated that "the increase in real GDP in the first quarter primarily reflected positive contributions from personal consumption expenditures (PCE)". Consumer spending is about 70 % of the US economy and as the consumer goes-so goes everything else. Where might consumer spending go from here?
From the BEA's first GDP estimate for 2007 (be aware that this report is a first estimate that will be revised twice in each of the next two months as more information comes in):
"Real (adjusted for inflation and chained to year 2000 dollars) disposable personal income increased 4.5 percent, compared with an increase of 5.3 percent in the fourth quarter".
As a consequence of the above, "real personal consumption expenditures increased 3.8 percent in the first quarter, compared with an increase of 4.2 percent in the fourth quarter".
In other words income and expenditures, though increased, grew at a slower rate then before. Consumers are making and spending more, but at a slower pace.
The question now is whether this is the beginning of a trend or a one or two quarter abberation. A big factor in this will be the ultimate direction of the housing market. Home asset appreciation has provided much of the capitol for the healthy spending levels seen in the past several years. As that wanes, the difference will need to be made up. Contributions from investments (like the stock market) and personal income can potentially offset the lack of home valuation that looks likely to be on the decline, but these are very complicated relationships that are difficult to assess.
Housing plays a critical role in the US economy because a downturn in housing can cause ripple effects in many diverse areas. For example many purchases related to housing including construction materials, furniture, plumbing and electrical fixtures etc will decrease, but it goes beyond that. Less jobs in real estate and mortgage banking. Less trucking to deliver goods that are now being purchased at lower levels. Less advertising for houses in newspapers and on the web. Less purchases of flooring, bedding, dishes and all the other things that people tend to buy for a new house. Less money for governments to collect from real estate taxes and all the hidden fees from home purchases.
And it isn't confined just to new home buying. Home price appreciation allowed for home equity loans that were used to purchase everything from the dormers, pools and extensions that everyone seemed to be doing to the vacations and tuitions people want for themselves and their children.
Absent in all of these government calculations is what can be referred to as "Psychological Effects". How will a typical consumer react to the fact that their house value has declined and may look to decline further? Does this make them likely to spend less? It's an "X" factor that no one can really estimate with any great certainty.
Another surprise in the GDP report was related to imports and exports:
"Real exports of goods and services decreased 1.2 percent in the first quarter, in contrast to an increase of 10.6 percent in the fourth. Real imports of goods and services increased 2.3 percent, in contrast to a decrease of 2.6 percent".
This is exactly the opposite of what should occur as a nations' currency depreciates like the dollar has. What could possibly be the explanation for a situation like this? Simple; the dollar has not depreciated by much against the basket of currencies made up from the emerging market economies because those economies control (manipulate) their currency valuations, keeping them artificially weak and thereby their products relatively cheap.
If the value of my major asset (my house) has decreased (or looks to decrease) I want to shop for some bargains. Imports from emerging economies (especially from China) are still very cheap. That's were the bargains are and it makes sense that as people get more and more nervous about their future they will look for the bargains more and more.
So how does the $ trade from here? Everywhere you look there seems to be talk about further $ depreciation. Housing, the consumer and the overall economy look to be getting worse before they get better. We had a Fed Bank President (Yellen from S.F.) talking about the possibility of recession, increased risks to growth and the need for the Fed to remain open to all options over the week end.
In the meantime we have some very important reports being released this week including information on prices, spending, the Chicago PMI, both ISM numbers and last but certainly not least, the NFP.
It could be one of the most important weeks of the year. Stay tuned.
Consumer spending remained the big prop holding up Q1 GDP, according to the first estimate. The BEA stated that "the increase in real GDP in the first quarter primarily reflected positive contributions from personal consumption expenditures (PCE)". Consumer spending is about 70 % of the US economy and as the consumer goes-so goes everything else. Where might consumer spending go from here?
From the BEA's first GDP estimate for 2007 (be aware that this report is a first estimate that will be revised twice in each of the next two months as more information comes in):
"Real (adjusted for inflation and chained to year 2000 dollars) disposable personal income increased 4.5 percent, compared with an increase of 5.3 percent in the fourth quarter".
As a consequence of the above, "real personal consumption expenditures increased 3.8 percent in the first quarter, compared with an increase of 4.2 percent in the fourth quarter".
In other words income and expenditures, though increased, grew at a slower rate then before. Consumers are making and spending more, but at a slower pace.
The question now is whether this is the beginning of a trend or a one or two quarter abberation. A big factor in this will be the ultimate direction of the housing market. Home asset appreciation has provided much of the capitol for the healthy spending levels seen in the past several years. As that wanes, the difference will need to be made up. Contributions from investments (like the stock market) and personal income can potentially offset the lack of home valuation that looks likely to be on the decline, but these are very complicated relationships that are difficult to assess.
Housing plays a critical role in the US economy because a downturn in housing can cause ripple effects in many diverse areas. For example many purchases related to housing including construction materials, furniture, plumbing and electrical fixtures etc will decrease, but it goes beyond that. Less jobs in real estate and mortgage banking. Less trucking to deliver goods that are now being purchased at lower levels. Less advertising for houses in newspapers and on the web. Less purchases of flooring, bedding, dishes and all the other things that people tend to buy for a new house. Less money for governments to collect from real estate taxes and all the hidden fees from home purchases.
And it isn't confined just to new home buying. Home price appreciation allowed for home equity loans that were used to purchase everything from the dormers, pools and extensions that everyone seemed to be doing to the vacations and tuitions people want for themselves and their children.
Absent in all of these government calculations is what can be referred to as "Psychological Effects". How will a typical consumer react to the fact that their house value has declined and may look to decline further? Does this make them likely to spend less? It's an "X" factor that no one can really estimate with any great certainty.
Another surprise in the GDP report was related to imports and exports:
"Real exports of goods and services decreased 1.2 percent in the first quarter, in contrast to an increase of 10.6 percent in the fourth. Real imports of goods and services increased 2.3 percent, in contrast to a decrease of 2.6 percent".
This is exactly the opposite of what should occur as a nations' currency depreciates like the dollar has. What could possibly be the explanation for a situation like this? Simple; the dollar has not depreciated by much against the basket of currencies made up from the emerging market economies because those economies control (manipulate) their currency valuations, keeping them artificially weak and thereby their products relatively cheap.
If the value of my major asset (my house) has decreased (or looks to decrease) I want to shop for some bargains. Imports from emerging economies (especially from China) are still very cheap. That's were the bargains are and it makes sense that as people get more and more nervous about their future they will look for the bargains more and more.
So how does the $ trade from here? Everywhere you look there seems to be talk about further $ depreciation. Housing, the consumer and the overall economy look to be getting worse before they get better. We had a Fed Bank President (Yellen from S.F.) talking about the possibility of recession, increased risks to growth and the need for the Fed to remain open to all options over the week end.
In the meantime we have some very important reports being released this week including information on prices, spending, the Chicago PMI, both ISM numbers and last but certainly not least, the NFP.
It could be one of the most important weeks of the year. Stay tuned.