That Stagnating Feeling

The financial markets sloughed off the sharp downward revision in real gross domestic product (GDP) for the 1st quarter. The news — released last Wednesday, June 25th — that the economy contracted by almost three percent annualized was greeted a collective yawn.

Media pundits and talking heads blamed the weather.  How convenient:  the weather always offers a ready explanation needing no hard analysis.

20140627 Empty Wallets -- Small Graphic

Wall Street types dismissed the report as an anomaly, citing the 4.3 percent (year-over-year for May) gain in the Federal Reserve Board’s (FRB) Index of Industrial Production or the Institute for Supply Management’s (ISM) Purchasing Managers’ Index (PMI) which remains above the 50 mark.

Both are true but both are not necessarily valid points in interpreting the GDP revision. One, manufacturing and other goods producing activities are a comparatively small part of the overall economy. And, the details suggest a spike in oil and gas extraction may be the reason for the strong gain in the overall index. Second, the PMI is a diffusion index; as such, small firms receive the same weight as larger entities. So while the PMI receives much media attention, it is not necessarily the best yardstick to measure the economy’s overall wellbeing.

20140629 Seeing Red -- Small Graphic

If one peers into the GDP numbers the pictures which emerges is one of stretched and strained household balance sheets. The real news in the revision was not the continuing economic drag of a slowdown in inventory investment; no, the real news was the large reversal (from the flash report to the final revision) in health care spending coupled with higher than normal winter energy costs.

Viewed through this prism the narrative is one of households straining to make ends meet. If this is so, we cannot rule out future periods of stagnation in the nation’s economic growth.

Click here to read the commentary:  20140627 That Stagnating Feeling