Even as GDP growth cools, consumer spending is keeping the economy humming
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Wednesday is one of those days when the folks who prepare statistics at the Bureau of Economic Analysis get to revise their preliminary numbers for how the economy did in the previous quarter, now that they’ve had a little more time and a little more data to work with.
The headline number doesn’t look so great: The BEA now says the economy grew at a 2.1% annual rate in the second quarter, which is down from 2.4% in the first estimate.
But dig a little deeper, and you’ll find some more positive numbers in Wednesday’s data: The personal consumption expenditures price index, which is the Federal Reserve’s favorite measure of inflation, was revised downward by 0.1%, as was the less-volatile core PCE number.
Meanwhile, disposable personal income and the personal savings rate were both revised upward. And corporate profit margins — at least at companies outside the financial sector — were revised upward too.
And all that good news is pretty much because of consumers.
Take Christine McDaniel, who has been traveling a lot recently. Last week, she was at a conference in Aspen, Colorado, and stayed a few extra days to go hiking with a friend.
“Yeah, we did our second 14er,” she said. “So, a mountain that is at least 14,000 feet high.”
She bought canned oxygen to deal with the altitude, rented a car, stayed at an Airbnb and went out to restaurants. In other words, she spent a lot of money.
McDaniel is an economist with George Mason University’s Mercatus Center and used to work for the Commerce and Treasury departments. She also happens to be emblematic of the growth in consumer spending, which was up 1.7% last quarter.
“It just doesn’t really feel like the economy is slowing down that much, so it doesn’t feel like you really need to spend less,” she said.
There were other contributors to gross domestic product growth: State and local government spending was up 4.7%.
“Their revenues are strong in a lot of key pockets across America, and they still have a lot of that COVID relief money that they haven’t spent,” McDaniel said.
But it’s consumer spending that really matters, according to Baird investment strategy analyst Ross Mayfield. That’s because it makes up close to 70% of GDP.
“So if the consumer is strong, you basically don’t have to worry about much else,” Mayfield said.
Even the downward revision of the headline GDP number is exactly what the Fed wants to see as a sign that its efforts to curb inflation are working, said Allison Luedtke, an economics professor at St. Olaf College.
“If I’m the Fed and I look at that number, I mean, that’s close — to me — ideal,” she said. “We’re doing well. No one wants to say ‘soft landing,’ right? We’re afraid to say that.”
Instead, Luedtke said that this number whispers it.
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