I really want to be excited about the third quarter GDP results that were released yesterday, but the details of the report gives me concerns. The economy grew by 2.5% in the third quarter which is a big jump over the paltry 0.7% rate experienced earlier this year.
Although 2.5% growth is good--it is not good enough to make a substantial dent in our unemployment rate. To have sustained employment growth you need the GDP to grow at a rate of at least 3%. Consumer spending makes up 70% of our economy. In order to have sustained economic growth we also need to see an increase in the income of our citizens. More income means that Americans can spend more and grow our economy.
So what did this report show? Consumer spending was up 1.54% over the quarter. That is great news--it means that 70% of our economy is growing. However, other data in this report suggests that this growth in consumer spending may not be sustainable. Inflation adjusted after tax income dropped by 1.7% in the quarter--the first drop in income since the fourth quarter of 2009. In addition the savings rate (savings as a percentage of disposable income) dropped to 4.1%--it's lowest level since early 2010. So what does this mean? Consumers bought more goods in the third quarter even though their income dropped. With income dropping how were consumers able to spend more? Simple--they dipped into their savings to pay for this spending increase.
The only way to have a sustained recovery is through increases in after tax income. If income goes up people can spend more. Let's all hope that this is just a minor, one-time, data blip and not the foreshadowing a more serious problem in our future.
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