Economic Commentary
Daniel Laufenberg, Ph.D.

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Numerous economic data series are released between the publication dates of the Laufenberg Economic Quarterly (LEQ). Therefore, this page is designed to provide commentary on the more recent data and their implications for the economic outlook.

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Disappointing but far from disastrous
(July 31, 2012)

It has been over a month since I last wrote a commentary. There are several reasons for my absence, but not necessarily in the order given. First, the same old issues keep popping up and there is just so much one can say about them. Second, I was not going to change my forecast until I saw the advance estimate for second-quarter gross domestic product (GDP) as well as the benchmark revisions to GDP for the prior three years. Third, it is golf season in Minnesota. The reoccurring issues seem to have taken on a new twist, the revised estimates of GDP for the last three years and the advance estimate for the second quarter have been reported, and my golf game has been terrible. It seems that I no longer have an excuse not to write something.

First, concerns about a recession, bond defaults, and bank failures in Europe, as well as their implications for the U.S. economy, continue to cloud the outlook and weigh on financial markets from time to time. At the moment, the stock market seems to be a bit more confident about a solution than it was a few weeks ago, but that attitude never seems to last. The new twist is that this situation is getting to be old news; that is, it has been in play for such a long time that analysts are getting impatient waiting for the widely advertised disaster to occur. Europe is in recession and likely will be there a bit longer. However, the severity of the recession has been greatly exaggerated. On the other hand, it probably will last longer than I initially expected. As such, the European economy will continue to be a mild drag on the U.S. economy in the second half of 2012, causing real gross domestic product (GDP) growth to be somewhat less robust than anticipated earlier. There will be more on this later.

Second, the advance estimate of second-quarter real GDP growth was slightly better than the consensus at the time it was released but far less than what I expected in the May forecast. Most of the shortcoming relative to my May forecast was in real consumer spending, which increased a scant 1.5% last quarter, and real government spending, which slipped another 1.4%. I was expecting real consumer spending to increase nearly twice as fast as it did and for government spending to be flat. I was wrong on both counts.

In the second quarter, the weaker than expected increase in real consumer spending was not because of a lack of income. According to the Bureau of Economic Analysis (BEA), real disposable personal income (inflation adjusted, after-tax income) increased 3.2% at an annual rate in the second quarter, following a sharply upward revised increase of 3.4% in the first quarter. Initially the BEA had estimated that real disposable personal income had increased a scant 0.7% in the first quarter. In other words, over the first half of 2012, real consumer income grew at an annual rate of 3.3%, while real consumer spending increased at a 2.0% pace. Clearly consumers were not held back in the first half by a lack of income.

If real disposable personal income continues to grow at about this same pace over the remainder of the year, it seems likely that consumer spending will accelerate somewhat in the second half. Of course, uncertainty about taxes next year, as well as energy and food price in the months ahead, may encourage consumers to save more than they might otherwise. As a result, my forecast for real consumer spending growth in the second half of this year has been revised downward to an average of 2.8% at an annual rate rather than the 3.3% pace projected earlier. And since consumer spending represents roughly 70% of the U.S. economy, this should be sufficient with some help from other sectors to boost real GDP growth in the second half to about 3.0%. The other sectors that are posed to contribute are the government sector, which has been a drag on real GDP growth in each of the last eight quarters and nine of the last ten, and the housing sector, which is finally starting to show signs of a revival.

Also included in the recent GDP report released by the BEA were the benchmark revisions for the prior three years. They were interesting but essentially mixed with regard to the assessment of where the economy has been. In particular, the contraction in 2009 was a bit less severe than reported earlier, the pace of the recovery in 2010 was not as strong, and the growth in 2011 was a tad better than reported earlier. In addition, real GDP growth in the first quarter of 2012 was revised slightly upward as well, closer to my original projection.

Another aspect of the revisions that I found interesting was that the annual estimates of corporate profits from operations for 2009-2011 were revised lower, with the bulk of the downward revision coming in 2010; that is, rather than an increase of 32.2% in 2010, the gain was 26.8%. The percent change in profits for 2011 was little changed-7.3% versus the earlier estimate of 7.9%. Most of the downward revision to profits came from the domestic financial sector. On the other hand, profits from the rest of the world were actually revised up over the three years ending in 2011 thanks to a substantial boost to such profits in 2010. That being said, corporate profits from operations as measured in the National Income and Product Accounts still showed marked improvement over the last three years, increasing to a level in the first quarter of 2012 that was 58.6% above the level in the first quarter of 2009.

Finally, there is very little to talk about with regard to my golf game. Maybe some new
equipment would help, but I doubt it. Like many things in the life, the problem is with the
operator. period

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For the current economic forecast, as well as other analysis and commentary, please visit the Stonebridge Capital Advisors website.

Dlaufenberg@stonebridgecap.com

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The views expressed here reflect the views of Daniel Laufenberg as of the date referenced. These views may change as economic fundamentals and market conditions change. This commentary is provided as a general source of information only and is not intended to provide investment advice for individual investor circumstances. Past performance does not guarantee future results.


2012 Commentary

Disappointing but far from disasterous
-- July 31, 2012

Assessing the recent weak economic data
-- June 8, 2012

Consensus too pessimistic about everything
-- April 16, 2012

Risks to the forecast
-- March 7, 2012

A good finish to 2011 but still not good enough
-- January 27, 2012

2011 Commentary

More evidence of a strong finish
-- December 22, 2011

Finishing Strong
-- October 14, 2011

Living in interesting times
-- September 8, 2011

A not so pleasant surprise!
-- September 2, 2011

Surprise!
-- August 16, 2011

Debt ceiling politics
-- July 25, 2011

Q2 growth: Another disappointment likely
-- July 14, 2011

Interpreting the ISM manufacturing index and the employment situation report for May
-- June 4, 2011

A slower start to 2011 than anticipated earlier
-- April 14, 2011

Is the dollar's status as the reserve currency at risk?
-- March 21, 2011

More trouble in the Middle East
-- February 26, 2011

Searching for the next debt crisis
-- January 13, 2011

2010 Commentary

What's going on?
-- October 15, 2010

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