Financial Perspectives – Summer 2011
Economic Outlook – June 2011: Hitting a Slow Patch
The U.S. economy began the year with a good deal of positive momentum. Consumer spending, which accounts for 70% of the overall economy, rose at a 4.0% annual rate in 4Q10. Small and medium-sized firms began to hire, a critical element in a sustainable economic recovery. Bank credit was starting to loosen up for consumer and business borrowers. Some headwinds remained, including lingering problems in the housing sector and strains in state and local government budgets. However, positive momentum was expected to offset these drags. Early in the year, real 2011 GDP growth was expected to be in the 3.5% to 4.0% range (4Q11-over-4Q10).
Unfortunately, the economy hit a wall with higher gasoline prices. Job growth added to disposable income in the first four months of the year and a 2% reduction in payroll taxes further boosted take-home pay. Disposable income rose 1.5% from December to April. However, adjusted for inflation, disposable income barely grew at all (up 0.1% from December to April).
Oil prices are always a wild card in the economic outlook. Strong global demand combined with political uncertainties in the Middle East and Northern Africa to send the world price of crude significantly higher. Gasoline prices ended 2010 at a little over $3 per gallon.
They rose to more than $4 per gallon in early May. Paying more to fill their gas tanks, consumers were left with less money to spend on other things.
Other factors also restrained growth. Housing prices continued to edge lower on a national level, pushing more homeowners under water on their mortgages (owing more than the home is worth) – and in turn, dampening consumer spending growth. State and local governments have been shedding about 25,000 jobs per month. That doesn’t sound like a lot, but this sector would normally be adding about 20,000 per month. The contraction in state and local governments directly shaved 0.4 percentage points from GDP growth in 1Q11, and the total impact was surely more than that as government job cuts reduce consumer spending.
Still, while recent data reports have been disappointing, they haven’t suggested an outright contraction in the economy. There is a natural tendency for the economy to recover from a recession. Granted, recoveries from recessions that are caused by financial crises tend to be very gradual, but there’s a potential for significantly stronger growth in the next few years as the economy eventually moves back toward its long-term trend. There should be some good investment opportunities for those willing to look beyond the economy’s short-term difficulties.
“Paying more to fill their gas tanks, consumers have less money to spend on other things.”
Raymond James & Associates, Inc. and Raymond James Financial Services, Inc. are wholly owned subsidiaries of Raymond James Financial, Inc. (NYSE-RJF).
The information contained in this newsletter has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. We may, from time to time, have a position in the securities mentioned and may buy or sell such securities in the course of regular business.