Bridgewater Daily Observations

A good succinct summary of the economy.

 

Bridgewater Daily Observations, August 1, 2012

 

As discussed previously, the US economy has slowed to a moderate growth rate in recent months, dragged down by weak household demand.  Household spending remains highly dependent on income growth, as the ability to borrow and spend remains much more constrained than in normal cyclical expansions.  Over shorter periods, when there has been significant stimulation, household spending has been somewhat stronger than incomes (i.e., savings rates declined).  But as the effects of stimulation have faded in recent months, household spending growth has been even weaker than income growth, savings rates have risen, and household spending has been one of the weaker spots of the US economy.  Conditions facing households have improved recently, as equity prices have recovered somewhat in recent weeks, home prices may have bottomed out, and interest rates have reached new lows.  Some of these modest improvements appear to be reflected in the July consumer confidence surveys, which improved slightly from June.  Over time, we would expect household spending growth rates to approximate the pace of income growth.  While this would be an improvement, without further stimulation household spending is likely to remain mediocre.

 

ECONOMICS FOR DUMMIES:

 

Consumer spending is a substantial part of the economy.  It’s hard for the economy to do well if the consumer is not spending money.

 

“…household spending growth has been even weaker than income growth, savings rates have risen, and household spending has been one of the weaker spots of the US economy.” – The consumer is reducing debt, paying cash as they go, saving more, investing less, and not increasing their spending on goods and services as they worry about the economy and their jobs.     

 

“Over time, we would expect household spending growth rates to approximate the pace of income growth.” -  Income growth has been week, consumer spending has been weak, therefore incomes would have to increase in order for consumer spending to increase and in order for the economy to thrive.

 

“While this would be an improvement, without further stimulation household spending is likely to remain mediocre.” - No one is forecasting income increases, so the economy is not likely to be all that great.

 

 

 

John Broussard

Assistant State Treasurer

Chief Investment Officer

State of Louisiana

Department of the Treasury