The Bureau of Economic Analysis released optimistic data
showing a Gross Domestic Product (GDP) increase of 4.2% in the output of goods
and services. The new numbers are a windfall compared to the previous 2.1%
decline in the first quarter of 2014. The new release of information uses more
accurate numbers than previous measurements which help the business community
make investment decisions.
The new numbers show an increase in nonresidential fixed
investments with smaller numbers in private inventory investment. Other factors
influencing the higher numbers were exports, personal consumption expenditures,
local government spending, and residential fixed investments. Confidence in the
economy may be encouraging purchasing behaviors, state spending, and business
investments.
Consumer confidence and consumer spending are associated in
economic theory (Ludvigson, 2004). As consumers become more confident about
their employment prospects and ability to earn a living wage they will naturally
spend more of their hard earned capital on products that improve GDP. The same
psychological principles apply to business and government.
We can see this operate in the decline and growth cycles of
consumer spending and consumer confidence. Consumer spending dipped .1% in July
after rising .4% in June (1).
Despite the dip, consumer confidence is rising and future estimates may adjust
consumer spending upwards. The polling company GfK showed that despite a
consumer confidence decline of -2 in July the numbers moved up to +1 in August (2).
Economic data rests on a battery of measurements to
determine future market prospects. If the consumer confidence and consumer
spending association is correct we should see an increase in consumer spending numbers
for August. A slow beginning to 3Q doesn’t necessarily mean it is going to end slowly
as housing and investments recover to support future GDP growth. As with all
projections, confounding variables impact the final results. Time is the
greatest predictor.
Ludvigson, S. (2004). Consumer confidence and consumer
spending. Journal of Economic
Perspectives, 18 (2).
