The U.S. economy has been like a used car that gets you where you need to go but is taking twice as long as it should because it can’t seem to accelerate – perhaps until now.
According to the Commerce Department, the U.S. economy grew at a rate of 5 percent from July to September which is higher than the estimated 3.9 percent. This is the economy’s fastest pace of growth in the past 11 years.
Behind the wheel of this growth is consumer spending, government spending (particularly defense), exports, and other investments. Americans spending shot up to 3.2 percent – a percent higher than the 2.2 percent estimated. Falling gas prices and health care fueled consumer spending. Business investments are the other private sector spending boost. Rising 8.9 percent, companies invested in new equipment to replace old ones and to expand their production capacity to meet rising demand stimulated by consumer spending.
What does this mean for us? Spending drives demand for goods and services. To meet new demand companies will purchase new raw materials and equipment as well as hire workers to increase output. More goods and services will drive down prices and greater employment means there are more consumers to spend money. And because gas prices are falling, we all have more money to spend and companies can add a few more buck to their bottom line or pass on savings in lowered prices. It’s a nice cycle, but susceptible to external factors.
The Washington Post is cautiously optimistic:
Well, at least by the sad standards of this slow and steady recovery. The truth is that for all the hype and headlines about every little head fake, the economy has just been chugging along at the same 2 percent pace the past few years. Sometimes it's grown a little bit faster than that when companies have had to restock their inventories or sell more overseas. And sometimes it's grown a little slower than that when the opposite has happened, or when, like last winter, Arctic conditions have kept people in their homes and out of stores. But, as you can see above, growth has been remarkably consistent if we look at it over the past year, and not quarter, to smooth out these regular ups and downs.
The economy's 2.7 percent growth the past 12 months actually isn't the fastest of the recovery, but it is the best. You can see that if we strip out the volatile inventory and net export numbers to get something that goes by the catchy name of final sales to domestic purchasers. It shows us the economy's underlying strength in terms of consumer spending, government spending, and private investment. Basically, how much of today's growth we can expect to continue tomorrow. And that's also grown 2.7 percent the past year, a post-crisis high. Most of that's due to stronger consumers, who thanks to the combination of lower unemployment and less debt, are finally in decent enough financial shape to start spending a little bit more. That's only going to continue now that job growth is picking up, and plummeting gas prices are taking money out of the pump and putting it into people's pockets.
Cautiously optimistic is the best way to describe this recovery. If the underpinnings of the economic recovery are spending, how confident can we be that consumers will continue to spend? That depends on employment and discretionary spending. While it’s true that unemployment is declining, that’s due to workers dropping out of the job market or finding part-time employment in industries like retail and food service. We don’t knock those industries and we appreciate the opportunity for work and even advancement that they afford, but while they pay the bills, they are not industries that pay high enough wages to make big purchases or make down payments on new homes. Falling gas prices give us more discretionary money to spend or travel, but if the price free-fall comes to an end tomorrow –which it very well could – consumers might close their wallets almost as quickly.
The real economic stall is still the housing market, which has been stuck in neutral. Residential investment was a meager 0.1 percent. We reported this week that half as many Americans are underwater than a couple of years ago. It’s a positive sign that more homeowners have the flexibility to move and sell but that’s not necessarily translating into home sales. Consumer spending can be fickle and heavily affected by external factors like inclement weather, whereas home spending and investments is much less volatile. There is also a move to reinstate some of the riskier lending policies that helped create the housing bubble that helped trigger the Great Recession in the first place.
President Obama will no doubt take credit for this improvement, but it should be notied that the U.S. economy is a powerful force and his policies have stiffled it for nearly six years.
Still, the recovery is picking up some speed but we need it to be sustainable and that takes the housing market to jump on board.