The economic recovery will not be as good as it has been historically after recessions, but the economy will do better than what it has done recently, said Maury Harris, managing director and chief US economist at UBS. There have been a number of problems that have been holding back growth and probably won’t be as harmful next year. From a historical standpoint, this isn’t normal, Maury said.
There was a modest increase in consumer spending recently. Asked if that means people have more disposable income or they are simply using credit to pay for basic necessities, Maury said a couple of things are going on simultaneously now.
Firstly, incomes are not going up that fast, but neither are prices. So whatever people are making can be stretched further. Secondly, the latest report shows people have started to borrow again. Also, for people who own home, there has been a nice turnaround in house prices; a phenomenon that economists call the “wealth effect.” So there has been a couple of factors that have been pushing up consumer spending, he explained.
Any pickup in growth will depend, to a large degree, in bigger gains in employment and wages. Asked if the latest GDP number, that showed an annualized growth rate of 2.8 percent in the third quarter, indicates those gains will be coming anytime soon, Maury said there are certain parts in the GDP number that did.
In particular, if one looks at the consumer spending number, the goods component has done pretty well this year. Consumer goods spending are running at a 3.5-4 percent annual rate. What held back consumer spending in the third quarter was the weather when there was a big drop in utilities consumption. But the underlying goods-spending is doing okay and the store sales number for October is also doing alright, he argued.
Companies have cut spending on equipment in the third quarter, a phenomenon that only took place once since the beginning of the recovery in mid 2009. Asked what message businesses are sending on the overall economy going forward, Maury said it looks like as if businesses did pull back out of concerns about what was happening in Washington when the confidence indices for businesses started to slip over summer.
However, the markets are probably going to come to the realization that the economy is not going to fall off any fiscal cliff and there will be some kind of budget agreement in Washington. Thereafter business confidence will hopefully come back; businesses are loaded with money and they have plenty of money to spend. Consumers are buying goods (indicating robust demand), though they may be doing so selectively, he observed.
The fourth quarter started with a sixteen-day partial shutdown. The third quarter witnessed the biggest gains in inventory since the first three months of 2012. Asked if a deadlock in Washington risks holding back production, Maury said the ISM numbers on manufacturing look pretty good for October, which indicates this inventory buildup is not much of a problem. Inventory of goods were a little bit over four percent, but sales of goods were also up a little more than four percent. So inventory is not really running ahead of sales, he explained.
Asked what happens to sales when businesses attempt to reduce their inventories, Maury said there’s no doubt that inventory build-up will slow down a bit going forward. But there are other things such as consumer spending that are getting better in the economy. Also cost of living is hardly going up, wealth gains in the stock market have gone up and house prices are turning around. So there are things that can give us a better consumption number in the next few months, he noted.
Asked to comment on the unemployment rate, Maury said the temporary bump is due to the folks who were on temporary furlough because they were counted as unemployed. But the rate will come down back again, he concluded.
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