Continued U.S. GDP Growth Contingent on Consumer Spending

In order to match the growth in GDP from last quarter, U.S. consumer spending must continue to remain strong. A number of economic factors have given economists hope …

In order to match the growth in GDP from last quarter, U.S. consumer spending must continue to remain strong. A number of economic factors have given economists hope that growth will continue, albeit at a lower rate than most recoveries. See the following article from Money Morning for more on this. 

The U.S. economy grew at a 3.2% rate last quarter, reaching a pace economists expect to be maintained through the year – but only if consumer spending remains strong.

The U.S. Commerce Department’s advance estimate of gross domestic product (GDP) cited consumer spending and rising exports as key drivers of the economy’s growth. A sharp slowdown in inventories stunted the increase. Excluding stockpiles, GDP grew at a 7.1% pace – its biggest increase since 1984.

U.S. GDP growth for all of 2010 grew by 2.9%, the biggest increase in five years. Last year’s growth turned around 2009’s struggling economy, which shrunk by 2.6%.

"The consumer really drove the economy in the fourth quarter," Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC, told Bloomberg News. "The economy has moved beyond recovery to a stable state of growth."

Growth in consumer spending, which accounts for 70% of the U.S. economy, hit a rate of 4.4%, the most since the first quarter of 2006. The extension of the Bush tax cuts, the continuation of emergency unemployment benefits, and a payroll-tax cut spurred shoppers to open their wallets more at the end of last year.

Spending on durable goods jumped 21.6% and spending on nondurable goods, like food and clothing, rose 5%.

Holiday sales at retailer outlets reached their highest level in five years, jumping 5.5%, according to MasterCard Advisors’ SpendingPulse.

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"Consumers have been on a recovering trend," John Ryding, chief economist at RDQ Economics,told The New York Times. "Consumers came into the holiday season after probably having a couple of years of being fairly frugal, and with a bit more cash in their pockets, and a bit more willingness to spend that cash."

The spending momentum must continue to fuel U.S. GDP growth, and some companies’ estimates predict a strong year for sales.

America’s wealthier shoppers are expected to continue driving retail sales this year. High-end retailers like Tiffany & Co. (NYSE: TIF) and Coach Inc. (NYSE: COH) reported strong holiday seasons, and the sales pick-up is expected to continue.

"The heavy lifting is being done by the upper-income households," Michael Feroli, a former U.S. Federal Reserve economist who is now chief U.S. economist at JPMorgan Chase & Co. (NYSE: JPM), told Bloomberg News. "They’re the ones benefiting the most from the stock market rally, and they’re spending."

The auto industry also is seeing a spending rebound. Ford Motor Co. (NYSE: F) raised its 2011 auto sales forecast to 13 million – 13.5 million vehicles, up from 12.5 million. The automaker is planning to boost hiring this year due to increased sales, and will hire more than 7,000 workers over the next two years.

Another positive sign for continued 2011 consumer spending was a consumer sentiment measure that was stronger than expected. The Thomson Reuters/University of Michigan Surveys of Consumers reported a Consumer Sentiment Index of 74.2, dropping slightly from 74.5 in December, but higher than the preliminary reading of 72.7 issued earlier this month.

The report attributed the confidence dip to consumer concerns over rising food and fuel prices.

U.S. GDP growth last month also got a boost from a narrowing trade deficit, as exports grew by 8.5%, up from 5.8% in last year’s third quarter. Imports fell by 13.6%. The smaller deficit added 3.4 percentage points to growth – the most since 1980.

Shrinking inventories prevented a higher rate of growth, stocked last quarter at a $7.2 billion pace, down from a $121.4 billion rate in the third quarter. But smaller stocks could lead to faster growth this year if spending continues and companies reload on inventories.

"The economy built virtually no inventory, which sets the economy up for a pick-up in growth in the first quarter," said RDQ’s Ryding.

But the increased economic growth isn’t enough to make a dent in a stubbornly high 9.4% unemployment rate. Analysts estimate that U.S. GDP growth needs to be closer to 5% for a full year to reduce the unemployment rate by 1 percentage point.

Economists are hoping a continued spending increase for businesses, which spent more on equipment and technology last year, will soon translate to an increase in hiring.

"Firms have the cash to hire," Augustine Faucher, director of macroeconomics at Moody’s Analytics, told The Times. "They just need the confidence to do so, and that could develop quickly."

Overall economists saw future U.S. GDP growth as promising, with economic factors likely to continue supporting a 2011 growth rate over 3%.

"All in all, looking through the volatility in the GDP components, this is an encouraging report, with solid gains in the key drivers of domestic demand (private consumption and business spending)," Peter Newland, senior economist at Barclays Capital Research, told MarketWatch. "While significant gains in net trade are unlikely to persist, neither are large drags from inventory accumulation."

This article was republished with permission from Money Morning.


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