April 1, 2014

Consumer Confidence Up, But Concerns Remain

1. US Gross Domestic Product Rose at 2.6% Pace in 4Q

2. New Economic Statistic Coming Later This Month

3. “Gross Output” Could Lead to a Value-Added Tax

4. Consumer Confidence is Up, but Concerns Remain

5. President Obama’s Job Disapproval Rating Hits New High


The Conference Board reported last week that its Consumer Confidence Index jumped to 82.3 in March (up from 78.3), the highest reading since January 2008, just as the recession was beginning. But the two underlying components of the Index provided two different perspectives, as we will discuss today.

Basically, consumers as a group are feeling better and more confident about the economy and their present situation. That sub-index has risen pretty steadily over the last two years. However, when asked how they feel about their financial situation six months from now, most consumers are much less confident. About as many expect their situation to get worse as those who expect it to get better. That’s not good.

But before we get to that topic, let’s take a look at last week’s third and final estimate of 4Q GDP which showed a modest increase (2.6%) over the second estimate in February. We now know that the economy stalled a bit in the 4Q of last year, following growth of 4.1% in the 3Q. And it likely slowed even more in the 1Q of this year due to bad weather.

Following that discussion, I want to introduce you to a new breakthrough economic statistic that we’ll be hearing about for the first time later this month.  It’s called “Gross Output” (GO) and is a measure of total sales volume at all stages of production. GO is much larger than GDP, the standard yardstick for measuring final goods and services produced in the economy. I’ll explain why GO is being introduced and why we investors need to pay attention to it.

Finally, President Obama’s disapproval rating has soared to a new all-time high, and his approval rating is falling once again. Americans continue to blame him for Obamacare, and 57% dislike his handling of the Ukraine situation.

US Gross Domestic Product Rose at 2.6% Pace in 4Q

The economy grew a little more briskly than the government previously estimated in the 4Q on stronger consumer spending, among other factors. Gross domestic product is the market value of all final goods and services produced within a country in a given period.

The nation’s GDP in the final quarter of 2013 increased at a 2.6% annual rate, up from the previous estimate of 2.4%, the Commerce Department reported last Thursday. That’s the government’s third and final estimate of 4Q growth. The pre-report consensus called for an increase to 2.7% GDP growth.

Consumer spending increased at a better than expected 3.3% annual pace in the 4Q, partly on stronger healthcare outlays, up from the previous 2.6% estimate. Also, state and local government spending and exports rose more rapidly than initially thought. Business equipment expenditures – a key gauge of companies’ appetite for capital spending – also picked up more than previously estimated.

Rising consumer spending underpins many analysts’ expectations for stronger economic growth this year, despite the weather-related disruptions in the first two months. The fading effect of last year’s tax increases coupled with fast-rising stock and home values are boosting spending firepower.

Still, some economists cautioned that meager income growth could act as a curb on consumer spending in the months ahead. Several forecasters said that the 4Q spending bump is not sustainable, and that will almost certainly be true for the 1Q of this year due to the extremely cold weather in January and February.

Declines in housing investment and government outlays were the two biggest drags on growth in the 4Q. Housing investment fell by 7.9%, slightly less than the 8.7% drop previously estimated – its first decline in three years amid rising mortgage rates. Recent cold weather has further chilled home-building activity, though building permits, an indicator of future construction, rebounded in February. Most economists expect the sector to make a positive contribution to economic growth this year, though likely smaller than last year’s.

Growth in the 4Q slowed from its 4.1% rate in the 3Q, though a measure of underlying economic strength improved. Growth of final sales of domestic product, a measure that excludes volatile inventories, accelerated to 2.7% from 2.5% in the 4Q. For all of 2013, the economy grew at a 2.6% nominal rate, slightly more than the 2.5% previously estimated. That followed growth of 2.8% in 2012 and 1.8% in 2011.

Consumer confidence

The economy gained momentum in the second half of last year, but much of the expansion was the result of aggressive inventory stockpiling by businesses. That led to a reduced need for firms to replenish shelves in the January-March quarter. That plus the unusually cold and snowy weather in January and February is expected to have yielded slower growth early in 2014. The first estimate of 1Q GDP will be announced at the end of April.

Yet many analysts expect the economy to pick up steam the rest of the year due to higher household wealth, lower debt and an accelerating housing recovery. That remains to be seen.

In other economic news, the Consumer Confidence Index rebounded strongly in March, as I will discuss below, rising to 82.3 from 78.3 in February. While that’s encouraging, the University of Michigan’s Consumer Sentiment Index was virtually unchanged for March at 80.0, up from 79.9 for February.

Personal income rose a better than expected 0.3% in February, following a rise of 0.2% in January. Orders for durable goods rose a solid 2.2% in February, up from 0.9% in January. Leading indicators rose 0.5% in February, up from 0.1% in January.

This morning, the ISM manufacturing index for March came in at a disappointing 53.7, slightly below the consensus of 54.1. On Friday, we’ll get the unemployment report for March which is expected to dip from 6.7% in February to 6.6% according to the pre-report consensus.

Important New Economic Statistic Coming Later This Month

As noted above, the Commerce Department’s Bureau of Economic Analysis (BEA) will give its first estimate of 1Q GDP on April 30. But the BEA is also scheduled to release a breakthrough new economic statistic for the first time on a quarterly basis.  It’s called “Gross Output” (GO), a measure of total sales volume at all stages of production. GO is much larger than the size of GDP, the standard yardstick for measuring final goods and services produced in a year.

This is the first new economic aggregate since Gross Domestic Product (GDP) was introduced over fifty years ago. Many argue that it’s about time we had a new measurement of spending throughout the entire production process, not just final output. GO is a move in that direction.

GO attempts to measure total sales from the production of raw materials through intermediate producers to final retail.  Some forecasters believe that GO is a better indicator of the business cycle. GO is a measure of the “production” economy, while GDP represents the “consumption” economy.  Both are essential to understanding how the economy works.

In short, by focusing only on final output,

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