Friday, August 29, 2014

GDP Rises and Consumer Confidence Recovers

The Bureau of Economic Analysis released optimistic data showing a Gross Domestic Product (GDP) increase of 4.2% in the output of goods and services. The new numbers are a windfall compared to the previous 2.1% decline in the first quarter of 2014. The new release of information uses more accurate numbers than previous measurements which help the business community make investment decisions.

The new numbers show an increase in nonresidential fixed investments with smaller numbers in private inventory investment. Other factors influencing the higher numbers were exports, personal consumption expenditures, local government spending, and residential fixed investments. Confidence in the economy may be encouraging purchasing behaviors, state spending, and business investments.

Consumer confidence and consumer spending are associated in economic theory (Ludvigson, 2004). As consumers become more confident about their employment prospects and ability to earn a living wage they will naturally spend more of their hard earned capital on products that improve GDP. The same psychological principles apply to business and government.

We can see this operate in the decline and growth cycles of consumer spending and consumer confidence. Consumer spending dipped .1% in July after rising .4% in June (1). Despite the dip, consumer confidence is rising and future estimates may adjust consumer spending upwards. The polling company GfK showed that despite a consumer confidence decline of -2 in July the numbers moved up to +1 in August (2).

Economic data rests on a battery of measurements to determine future market prospects. If the consumer confidence and consumer spending association is correct we should see an increase in consumer spending numbers for August. A slow beginning to 3Q doesn’t necessarily mean it is going to end slowly as housing and investments recover to support future GDP growth. As with all projections, confounding variables impact the final results. Time is the greatest predictor.

Ludvigson, S. (2004). Consumer confidence and consumer spending. Journal of Economic Perspectives, 18 (2).

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