State Of The Economy

What demand for vehicles gave us in the summer, it will take away in the fall. The cutback in purchases led to a decline in consumption in both August and September. In October, there was only a modest increase. Early indications are that the holiday shopping season is decent, but nothing spectacular. Unless households start picking up the spending pace, consumption could be down this quarter. Can they do it? I don’t know. Although gasoline prices have dropped, they are still high.

All the fears of the economy falling apart after the hurricanes have totally disappeared. In its place is exuberance about the apparent strength that we see in the data. Indeed, during the summer quarter, growth was robust. But is that really the situation now? While things are looking up, there are some nagging doubts that the consumer can actually hold up. That makes the outlook for the first half of next year a little less certain.

Like any good economist, I see both sides of the economic coin. And that is clearly the case with third quarter growth. One look at the top line number and you are convinced that we are back into economic nirvana. Indeed, the 4.3% revised growth rate was impressive.

The expansion was broad-based. According to the nation’s purchasing managers, both manufacturing and services hummed along through November. As a result, productivity surged, easing inflation fears. But maybe the best news came from the labor market. In November, 215,000 new employees were added to the payrolls. Despite the huge losses in the Gulf region, employment even expanded in September and October. The unemployment rate of 5% is reasonably low and it looks to be heading down, as job gains should remain solid.

So, why am I uncertain about the future? It has to do with household spending. The consumer was the key to growth in the third quarter, but that may not last. In July, we set a record for motor vehicle sales. But the days of employee discounts are behind us and since then, people have largely stayed away from the showrooms. 

The three months of weak vehicle sales have major implications for overall spending. What demand for vehicles gave us in the summer, it will take away in the fall. The cutback in purchases led to a decline in consumption in both August and September. In October, there was only a modest increase. Early indications are that the holiday shopping season is decent, but nothing spectacular. Unless households start picking up the spending pace, consumption could be down this quarter. Can they do it? I don’t know. Although gasoline prices have dropped, they are still high. With the heating season starting to stretch budgets, we could see some very conservative buying. 

As for income, that is not growing quickly. Wage gains are modest and when adjusted for inflation, they have actually fallen recently. The better job growth will help, but income growth is just not strong enough to create lots of new spending. 

All this implies a more modest economic expansion this quarter and into the first half of next year. Nevertheless, the Fed will likely keep raising rates and that should lead to higher longer-term rates as well. Mortgage rates are still low, but those days may soon be over. So, as I look out over the landscape, the economy is still expanding and there are no risks of a recession anytime soon. Although growth may not match what we have been seeing, there is still reason to approach the year ahead with optimism.

Joel L. Naroff, Ph.D., is Chief Economist for Commerce Bank. Commerce Bank, is a leading financial services retailer with more than 350 convenient stores in New Jersey, New York, Pennsylvania, Delaware and new markets Connecticut, Washington, DC and Virginia. Headquartered in Cherry Hill, NJ, Commerce Bancorp (NYSE: CBH) has $36 billion in assets and, in third quarter 2005, achieved a deposit increase of deposit increase of 29% and total asset growth of 28%. Please visit the company’s interactive financial resource center at commerceonline.com.

*****
To subscribe to or advertise in The Black Star News, the world’s favorite Pan-African news weekly, please call (212) 481-7745. Contact us via
[email protected] if you have any questions or news tips.

Leave a Reply

Your email address will not be published. Required fields are marked *