The hidden worry behind the impressive US GDP

11 November, 2013

On Thursday, the ECB may have attracted the headlines with a surprise interest rate cut, but what crept under the radar was the news that the US GDP expanded in the 3rd quarter, growing annually at 2.8%. This bullish news took many by surprise and led a surge in US currency strength.

Despite this, there is a hidden element in the US GDP release which would have internally disappointed.

Consumer spending

How important is consumer spending for the US economy?

Very important. According to the Federal Reserve Bank of St. Louis, consumer spending accounts to the largest proportion of US GDP.

The World Bank has previously expressed that consumer spending equates to nearly 70% of the US economy. The latest US GDP release showed that consumer spending reduced to 1.5% growth, a 20% contraction from the previous quarter.

Source: US Department of Commerce, Bureau of Economic Analysis.

In European countries, the consumer spending levels are around 50% - 60% of GDP.

A slowdown in consumer spending could indicate a decline in median household income, something the U.S Central Bureau has previously been bearish regarding.  Currently, median household income is 8.3% lower than pre-recession.

One reason why we are noticing a decline in consumer spending growth is likely related to the United States not adding the expected quantity of jobs to their payroll. A high proportion of the employment created have been in lower paying industries.   

Overall, the US GDP impressed and surprised onlookers. Right now, the US hierarchy will not be overly concerned by consumer spending slowing down, but it will certainly be something that will be closely evaluated in the upcoming future.  

Finally,  reduced consumer spending explains why inventory build up also raised eyebrows. Inventory build up refers to products that have been produced, but not yet sold. A scenario any corporation would rather avoid.

Written by Jameel Ahmad.
Follow Jameel on twitter @JameelAhmadFX.

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