Thursday, July 07, 2011

“Easing Headwinds” Mean Smoother Economic Sailing in Second Half

I understand that this is not a time to be celebrating the economy. As long as I can remember, it has never been a time to be celebrating the economy. There was, and is, always a risk that something can go wrong.

I tend to watch these things closely because I work for a technology company, specifically a technology company that markets itself via various Direct Marketing processes, and the company’s profits are very sensitive to economic fluctuations.

In 2010, we had an “up” year but not a stellar year. And in the first half of 2011, it has been very tough going. That’s why I’m encouraged when I see stories like this one:
Economists expect real gross domestic product will grow at an annual rate of at least 3% in the third and fourth quarters. It isn’t a gangbuster pace, but far better than the sub-2% growth seen for the first half.

The best reason to believe economists’ forecast will be right is that two crucial supports for growth are already in place — and not just based on wishful thinking.

The first is falling energy prices. According to economists at the Royal Bank of Scotland Group, the nearly 50-cent drop in fuel costs since May is about equivalent to the net boost provided earlier this year from the drop in social security withholding–a tax cut that quickly went to paying the higher prices at the pump.

Alan Levenson, chief economist at T. Rowe Price, calculates that if prices stabilize, lower gas prices will lift purchasing power by 0.3 to 0.5 percentage point of income in the current quarter.

The second support is the rebound in vehicle production.

Output plunged in the second quarter because auto makers could not get parts from Japan after the earthquake and tsunami. The decline cut an estimated 0.5 to 1 percentage point from GDP growth last quarter, probably a big reason why growth stayed below 2% after a meager 1.9% pace in the first quarter.

Japanese production lines got back on track sooner than some expected. With the parts pipeline flowing again, U.S. vehicle production is set to bounce back (although the rise in imported parts will offset some of the gain to top-line GDP growth).

The hope is that stronger output growth will lead to better job gains, triggering the virtuous cycle of stronger income growth leading to better consumer spending.

But that isn’t a sure thing.
So it isn’t a “sure thing”. But in the words of an iconic American character, “it’s one less thing” to worry about.


  1. I'd like to believe it John, and I hope you are right.

    A couple of counterpoints:

    "Supply of Silverado has ballooned to 6 1/2 months worth..."

    "...if year-over-year GDP growth dips below 2%, a recession always follows. It is now at 2.3% [and currently heading lower]."

  2. Axis, I know .... crude oil futures are already back up over $98...