US Economy Weaker Than It Looks

Fresh data seem to suggest the US economy is revving up, with growth rising at its fastest pace in two years. Yet a deeper look at the numbers reveals that strength may be overstated. Worse, that could spur the Federal Reserve to raise interest rates too soon.

Between July and September, the nation’s gross domestic product rose an annualized 2.9%, far exceeding economists’ forecast and a big jump from the tepid pace seen earlier in the year. On the surface this is great news. Expectations have been strong for a second-half bounce-back. And Wall Street has been ready for some good news, given the ongoing corporate earnings recession, fears over a Fed rate hike and frayed nerves heading into election day, CBSnews reported.

So why isn’t that headline GDP number as good as it looks? For one, consumers seem to be pulling back on spending, with consumption up just 2.1%, versus a 4.3% gain in the second quarter and less than the 2.6% that was expected.

Capital Economics estimates that a full 0.9% of the GDP gain in the third quarter was driven by the one-off surge in soybean exports alone—a gain the research firm expects it to be reversed in the final three months of the year.

“Last quarter’s double-digit gain in exports is unlikely to be repeated, and it is worth noting that underlying private demand remains soft,” Deutsche Bank analysts said in a note. “For these reasons, future economic gains are likely to remain extremely modest.”

 Less Encouraging

Outside of exports and inventories, meanwhile, the news for the economy was less encouraging. Consumption disappointed, residential investment dropped 6.2%, and equipment investment fell 2.7%. Overall, the growth rate of final sales to domestic purchasers—a measure commonly seen as a “check” on the health of the GDP growth number—actually slowed to 1.4%, from 2.4% in the second quarter.

Other analysts are already forecasting stormy weather heading into the critical holiday shopping period. Macroeconomic Advisers estimates that the economy will grow at an annualized rate of just 1.5% in the fourth quarter. The upshot: For the first time since 2013, economic growth this year is likely to fall shy of 2%.

By that measure, and with many economists—including the Fed—projecting tepid growth for years to come, the recovery is running out of steam.

Despite that long-term slowdown, the jump in third-quarter growth, along with some positive momentum in other gauges of the economy, may be enough to persuade the central bank to resume hiking interest rates.

 Something Missing

For all the progress the US economy is making toward healing the damage done by the last recession, there’s something missing: Businesses just aren’t investing the way they used to, Bloomberg reported.

Last week’s report on US GDP offered some assurance that the economy has enough momentum to allow the Federal Reserve to pull back a bit more on its stimulus efforts.

In some crucial ways, though, businesses aren’t acting like they have a lot of confidence in the future. Consider the pace at which they are expanding their capital base—investment in the buildings, equipment and know-how needed to support growth, minus depreciation. It turned negative for the first time on record during the recession, and has yet to recover to the rate of previous expansions.

Given a historically low employment rate and meager wage growth, workers are so cheap that businesses prefer hiring to investing in capital. This would help explain why job gains have outpaced the broader economy, and why productivity growth—measured as output per hour worked--has been so slow. If so, investment should eventually pick up if the Fed succeeds in getting wages to rise faster.