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Commentary: Drumbeats of a Coming Slowdown

The reaction to Thursday's ""report"":http://dsnews.comarticles/calendar-boosts-may-income-spending-increases-2013-06-27 on personal income and spending for May was generally positive. Personal income rose 0.5 percent from April--five times what was expected--and personal consumption expenditures (or PCE) were up 0.3 percent, matching economist forecasts.


The reaction may have been positive, but it may also have been misplaced.

To be sure, an increase in incomes is good news. The monthly personal income report captures every type of personal income save one, income from capital gains. May data was distorted somewhat by the calendar. Since June 1 fell on a Saturday, Social Security checks were accelerated to May. Income at flood-ravaged farms fell for the second straight month, but wage and salary income, which had been down in April, came roaring back in May.

The concern in the report came more from the spending side.

While personal consumption spending was up in May, average spending for the first two months of the second quarter was barely $15 billion ahead of spending for the first quarter. Indeed, PCE in April was down $39 billion from March.

For the entire first quarter, PCE was $11.35 trillion, up $301 billion from the fourth quarter. A similarly sized increase in the second quarter would require spending in June to jump a staggering $240 billion from May. It ain't gonna happen.

The first quarter, as we learned Wednesday, stumbled.

Economic growth as calculated from Gross Domestic Product is reported in waves. Less than a month after the quarter ends, the Bureau of Economic Analysis issues an advance report on the results for the quarter just ended based on preliminary data reports and assumptions for data reports not yet released.

One month later BEA uses updated information still not final for a second estimate. Finally just about three months after the quarter ends, BEA is ready to issue its third report. Even then the numbers may not be ""final"" as data are constantly refined, but the third report is pretty close to what goes down in history books.

GDP growth in the first quarter over the fourth was initially reported, in April, at a 2.5 percent annualized rate, then notched down to 2.4 percent until the ""final report"":http://dsnews.comarticles/1q-gdp-growth-trimmed-2013-06-26 of 1.8 percent issued last Wednesday. While 1.8 percent is better than the 0.4 percent growth of the ""fourth quarter"":http://dsnews.comarticles/revised-gdp-further-positive-in-report-2013-03-28, it is far from robust and doesn't provide the momentum for stronger growth as the year progresses.


Indeed, to achieve stronger growth the economy has to overcome significant headwinds, not the least of which is the budget sequestration, which although it didn't kick in until March (the third month of the first quarter), it noticeably reduced government spending.

Government spending represents about 20 percent of GDP but has an impact far beyond its proportional share. That said, a graph of government spending closely resembles the curve of total GDP.

The real influence though is consumer spending, (about 70 percent of GDP), which is why the sharp slowdown in consumer spending in the first two months of the second quarter takes on a significance surprisingly missed by other analysts who make their living forecasting things like GDP growth.

Consumer spending for the first two months of the second quarter averaged $11.365 trillion, up 0.33 percent from $11.33 trillion in the first two months of the first quarter. Spending in the first two months of the first quarter was up 0.82 percent over the first two months of the fourthâ€"- and remember, the first quarter turned out to be weak.

Indeed, several major banks did lower their second quarter GDP forecasts: Barclays cut its GDP growth forecast by 0.4 percentage point to a 1.4 percent pace. Goldman Sachs trimmed its forecast by a tenth of a point to 1.7 percent, while Morgan Stanley reduced its estimate to 1.5 percent from 1.6 percent.

With those reductions, the jobs outlook also looks bleak as most economists believe GDP growth of 3.0 percent or greater is necessary to stimulate hiring and job creation. From 1947 until 2013, the GDP growth rate averaged 3.23 percent, reaching an all-time high of 17.2 percent in March 1950 and a record low of -10.4 percent in March 1958.

Indeed there has been a mismatch between GDP growth and job growth (payroll jobs) in the last two quarters.

In the first weak fourth quarter--0.4 percent growth--the number of payroll jobs grew an average of 209,000 per month. In the stronger first quarter--1.8 percent growth--payroll jobs increased 207,000 per month. Even more confusing, household employment--the number of people actually working (some of whom may have had multiple jobs)--increased an average of 110,000 per month in the fourth quarter, but fell an average of 6,000 per month in the ""stronger"" first quarter. The unemployment rate in the fourth quarter was 7.8 percent falling to 7.7 percent in the first.

To be sure, just as it may not be sufficient to use two months of income data to pronounce a trend, using two quarters of GDP and labor data (payroll jobs or employment) may be misleading.

What is not misleading though is that the economy's struggles remain and will continue without strong, decisive action from the shapers of shape fiscal policy.

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_Hear Mark Lieberman Friday on P.O.T.U.S. (Sirius-XM 124) at 8:45 am eastern time._

About Author: Mark Lieberman

Mark Lieberman is the former Senior Economist at Fox Business Network. He is now Managing Director and Senior Economist at Economics Analytics Research. He can be heard each Friday on The Morning Briefing on POTUS on Sirius-XM Radio 124.

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