U.S. Consumers, Businesses Taking it Slow

Well, the US economy is having a lackluster performance so far and the anemic growth is expected to last until the end of the year. Economists however are expecting US to bounce back on 2013 once the fiscal cliff hump is over.

WASHINGTON (MarketWatch) — The U.S. manufacturing sector has contracted, consumers are watching their wallets and lawmakers in the nation’s capitol are fiddling their thumbs.

Not a recipe for a stronger economy.

The latest batch of economic data is expected to show the U.S. muddling along. Consumers are spending too much on necessities such as gas and big-ticket manufactured goods are no longer flying off the shelves. A modestly improved housing market is not expanding fast enough to offset downward pressures on the nation’s growth, either.

MarketWatch consensus

DATE	REPORT	CONSENSUS	PREVIOUS
Sept. 25	Consumer confidence index	65.0	60.6
Sept. 26	New home sales	380,000	372,000
Sept. 27	Weekly jobless claims	375,000	382,000
Sept. 27	Durable goods orders	-5.3%	4.1%
Sept. 27	GDP revision	1.7%	1.7%
Sept. 28	Personal income	0.2%	0.3%
Sept. 28	Consumer spending	0.5%	0.4%
Sept. 28	Core PCE price index	0.1%	0.0%
Sept. 28	UMich consumer sentiment	78.9	79.2

Economists expect those trends to persist to the end of the year. The hope in 2013 is that lackluster global growth will gain more of a shine and that Washington won’t fall off a so-called fiscal cliff by letting big tax increases and spending cuts take effect in January as scheduled.

“Once we get over that at the end of the year, we are clearly expecting some confidence to come back to consumers and businesses,” said Yelena Shulyatyeva, an economist at BNP Paribas.

Cautious consumer

The big report of the week focuses on consumer spending — by far the biggest source of economic growth.

Americans likely increased purchases by 0.5% in August, the Commerce Department is expected to report on Friday. Incomes probably rose by 0.2%, according to economists surveyed by MarketWatch.

The headline, however, may turn out to be deceiving. Gas prices spiked in August and consumers had to shell out more to fill up their tanks. That’s not the kind of spending that helps an economy grow.

Indeed, gas stations last month reported their biggest increase in sales in nearly three years. Stripping out gas, retail spending rose a modest 0.3% in August, with auto purchases accounting for the bulk of sales. Consumers spent the same or less on a wide array of goods.

In any case, spending cannot outpace income growth for long, regardless of how consumers use their money. That would require them to go deeper into debt, something most Americans want to avoid given all the economic uncertainty.

“Most of the increase in spending has come out of savings,” said Neil Dutta, head of U.S. economics at Renaissance Macro Research. “I think consumer spending is likely to slow further.”

Down to business

Businesses, for their part, have already reined in spending. Key export markets such as Europe and China have slowed and fear of the fiscal cliff could prompt companies to withhold investment and hiring until next year.

Further evidence of corporate caution could come with the latest report on durable goods. Orders for these long-lasting and typically expensive goods — computers, appliances, tractors — probably fell 4.5% in August, according to the MarketWatch survey.

Granted, most of the decline is likely to derive from a drop in aircraft orders, a volatile category that often skews the report. Yet orders for durable goods outside of autos and airplanes have been soft since the end of spring. That’s a clear sign of weakness.

The best news this week, once again, will probably come from reports on home prices and new home sales. Sales have risen sharply in 2012 after falling to a record low in the prior year — and rising demand is causing prices to catch up. People who have been holding off on buying a home don’t want to wait so long as to put the dream of ownership out of reach.

“Once manufacturing was a driver and housing was a laggard,” Shulyatyeva said. “Now they’ve switched.”

Yet housing is just starting to bounce off what appeared to be a bottomless pit and the market is not as important as it once was. Jim O’Sullivan of High-Frequency Economics calculates new-home construction accounts for just 2.5% of the economy now compared to a peak of 6.3% in 2005.

As a result, Dutta believes the modest improvement in housing is far too small to do the overall U.S. economy all that much good.

“The recovery story in housing is overdone,” he said. 

Jeffry Bartash is a reporter for MarketWatch in Washington.

http://www.marketwatch.com/story/us-consumers-businesses-taking-it-slow-2012-09-23