The latest GDP data showed the U.S. economy growing at an anemic one-point-two percent as strong retail sales were largely canceled out by a reduction in business investment. Most disturbingly the pace of growth was far below forecasts. Along with the disappointing numbers came a downgrade of the growth rate in Q1, 2016 to just one percent.
The data comes as a disappointment after a good jobs report and increased consumer spending. It really looked like the economy was gaining a tailwind but the recent numbers, about half of what economists were expecting, painted a somewhat darker picture.
Business Cut Investment
Businesses cut fixed investments by the most since 2009 while inventories fell for the first time since 2011. This is particularly troubling news for the future because business investment is one of the main pillars of economic growth. Some analysts point to the U.S. election as a source of uncertainty for business leaders and, with the election not happening until November that means the rest of 2016 is basically blown for investors.
Government Curtailed Investment
Another growth impact was the downturn in government spending at the local, state and federal levels. This is also not unusual in an election year but the timing, coinciding with a cutback in business investment, ended up being more serious than it would by itself.
Not All Bad News
There were a couple bright spots in the recent report on economic growth. Personal income rose, reflecting a general upturn in wages and salaries. It wasn’t just gross income that went up but disposable income increased over three percent. Those numbers were reflected in consumer spending and the cost of goods and services. When consumers are spending money, it’s easier for business to maintain price points and margins.
Data Will Impact Fed
If the Fed was nervous about raising rates before, this report should terrify them. The soft pace of growth will likely take the September interest rate hike off the table completely. If the softness continues, and there’s nothing in the report to suggest it won’t, that would leave an interest rate hike off the table entirely in 2016.
Consumers Keeping The U.S. Out of Recession
Consumer spending is, virtually, the only thing keeping the U.S. economy out of recession. The bizarre angle to that fact is the economy otherwise looks pretty good. If we’re one step from a recession when things are going well, what would happen if the global economy stumbled on something major?
But consumers are not spreading the wealth around uniformly. Car sales are holding up, for the moment, but restaurant spending is down. In fact, the restaurant industry itself could be in a recession even though the rest of the economy is still limping along.
This is a time to be cautious investing. The slightest whiff of bad news could push us into economically dangerous territory.
