4 Signs that Q3 Economic Growth is Going to be Weaker than Expected

By Walter Kurtz, Sober Look

Those hoping for the US economy to accelerate in the second half – and many economists made that call early in the year – will be disappointed. While employment metrics seem to show steady improvements, putting the Fed on the “taper path”, the economy is facing some increasing headwinds. Here are four indicators signaling a tough road ahead.

1. The rate of improvement in the housing sector is slowing. Weak new home sales number was the first indication that not all is well with US housing (discussed here), but now home price increases (HPI) have leveled off. This trend may actually take MBS off the table for the Fed’s taper, leaving the central bank to focus on cutting back only the treasury purchases.



TD Economics: – To make matters worse, the rapid recovery in the housing market seems to have hit a snag. Rapidly rising mortgage rates resulting from taper-talk may already be showing up. Both new and pending home sales have declined in July. Moreover, measures of home price growth failed to accelerate in June, although it remains unclear whether due to higher rates or increasing inventory of properties for sale.

2. Personal income growth remains weak.

NY Times: – After rising 0.3 percent in June, income was held back in part by steep government spending cuts that reduced federal workers’ salaries. Overall wages and salaries tumbled $21.8 billion from June, with a third of the decline coming from forced furloughs of federal workers.

3. Growth in consumer spending (which represents over 70% of the GDP) has slowed as well.

Real consumer spending


WSJ: – A paltry increase in consumer spending in July showed the U.S. economy starting the second half of the year on a bumpy path, creating another risk to growth along with overseas turmoil and Washington budget battles.

U.S. personal spending on everything from cars to clothing rose a mild 0.1% in July from a month earlier, the weakest since April, the Commerce Department said Friday. Overall incomes improved slightly, but wages and salaries fell 0.3%, pushed down by federal spending cuts that spurred furloughs across the government.

Americans’ willingness to open their wallets has been a key driver of the recovery for years, despite still-high unemployment and stagnant wages. Better-than-expected growth in the second quarter—the economy expanded at a 2.5% annualized pace—was largely due to strong consumer spending, which represents more than two-thirds of demand in the U.S. economy.

But the latest data showed that consumers entered the third quarter with a thud.

4. As discussed earlier (see post), consumer confidence has peaked in the second quarter and has been declining steadily since. What’s particularly troubling is that according to Gallup polling right before this weekend, economic confidence index suddenly dove to the lowest level since the sequester went into effect in March. The uncertainty related to the Syrian crisis and potential US military involvement is one potential explanation.

Consumer confidence


Add to this the potential shock associated with another fiscal showdown brewing in Washington and we are looking at subpar growth in the United States in the second half of the year.


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Sober Look

Sober Look

Sober Look was founded by Walter Kurtz, a New York based hedge fund manager and credit markets specialist.

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  • Suvy

    I think the US could experience stronger economic growth if China rebalances. The problem is that China basically turbocharged growth at the expense of the US export sector by buying US debt to run a massive current account. If those current account balances wane and start going in the negative while the entire world takes up beggar thy neighbor policies, it could help the US since the US is driven by domestic demand. Another thing to note is that the extremely high commodity prices are also driven by Chinese overcapacity. Once the overcapacity corrects and commodity prices come crashing down, it would really help out US middle class families that would now have more money left over to buy other goods or repair their balance sheets further.

  • Andrew P

    But a Chinese rebalancing would also cause huge price rises on imported goods – thus large inflation in the US. Nearly all manufactured goods sold in the US are made in China.

  • Matt McOsker

    And the budget deficit will continue to shrink, then add demand leakages such as the trade deficit, and you will certainly be set up for recession. This time it will be uglier because people cannot offset easily via private borrowing.

  • Johnny Evers

    Median income is down, median household net worth is down. The only reason households have been able to maintain spending is that they are eating their net worth.
    More QE, growing deficits — neither addresses the problem or presents a long-term solution. QE stimulates the net worth of the wealthy and deficit spending doesn’t stimulate income growth.
    I don’t know what the solution is but until we confront the tough questions we are running on a treadmill that will keep going faster.

  • Old Dog

    All four items point toward further buying of duration by the Federal Reserve. That can only add support to equities.

  • Greg

    “Eating their net worth”

    Good way to put it Johnny. Thats all monetary policy can do, it allows you to get a little more out of what you already have but what people really need is more, especially working people. Its like a 5 man poker game where one guy has all but 4 of the chips and he just tells everyone else, “Just cut off a piece of your chip and that will be the ante”

    What we need is some third party to either
    1) Give all participants more chips
    2) Make the current leader redistribute some of his extra

  • Suvy

    The largest expenditures for American families and the middle class are debt service, food, rent, and energy/commodity prices. If China experiences a rebalancing, food and energy costs would come crashing down while the current account balances would reverse dramatically. That would more than offset the possibility of larger prices from Chinese companies going bust.

    I actually expect deflationary pressure if China goes down, not inflationary. I highly doubt that prices of anything here will go up as all of the export companies that were in China will just go somewhere else to places like Mexico where manufacturing has been killed over the past 10 years due to the rise of the export juggernaut. I’m not even sure that a Chinese rebalancing would cause prices to go up anywhere; I actually think it’d be extremely deflationary on goods across the world.

  • Mr. Market

    The FED’s “Taper Talk” was meant to disguise the fact they don’t control interest rates. “Mr. Market” does.

  • Cesar

    Like in Japan?

    What total rubbish.
    The Fed says tomorrow that they believe a 10bps corridor around 1.5% is correct for a ten year and that they will target that range …… >>> bingo, by 8AM US 10Yrs will be trading at 1.5%. The *real* Market knows that the Fed controls interest rates if/when it wants to.

  • Mr. Market

    Nope. Never heard of Demand & Supply ?

  • Suvy

    What happens to the value of the currency if the Fed targets the 10yr. Usually, yields go up in the longer run when central banks target longer range bonds anyways. There is a short run liquidity effect, but eventually the market catches on and bond prices fall. If you try to use the short run liquidity effect to keep a tag on yields, the currency will begin to cascade.

  • http://brown-blog-5.blogspot.com/ Tom Brown

    I’m not sure I follow you Suvy. Say the CB targets 10 year yields to be no higher than X%. They have a bottomless pocket so they buy 10yr until the rate is X% or less. Now they have a stock of 10yr and can keep it no less than X% as well if they want. How do 10yr prices fall? Why would anyone accept a low offer if the CB was offering more? Why can’t they target 10 yr like they do the FFR, indefinitely? What do you mean the currency will “begin to cascade?”

  • sean

    the fed will be able to keep 10 yr rates at their target longer than you can stay short hoping the market is on your side of the trade. as a reslt 10 yrs stay at their target until they decide to let them move.

  • Benjamin Cole

    The Fed should announce it will taper up as long as PCE deflator is below 3.5 percent and unemployment above 5 percent.

    We have a Fed that has achieved record low inflation rates…in the face of the worst recession since the Great Depression. This is not the time for victory over inflation…

    This is not an accommodative monetary policy. The Fed has its wing-tpped shoe planted firmly right on the money windpipe of the economy.

  • Johnny Evers

    The idea that the Fed can control the 10-year rate indefinitely seems hypothetical to me.
    Is it possible? I suppose it is.
    But has it been done before?
    Would it create problems that we cannot envision at this time?
    Would the Fed merely have to announce the intended rate, or signal it in some way, or would the Fed really have to buy up all the bonds?
    What would that lead to?
    I think we ought to be careful about assuming the Fed has that kind of weapon, would use it, and could use it without blowing us all up.

  • Suvy

    What if more people start dumping bonds every time the Fed comes in to buy more. Every single time QE took place, yields went up, not down, and stayed elevated until the programs were discontinued. If inflation is running at 5%, it’ll be very difficult to keep 10 yr rates at 2% and if you try to, you’ll create more inflation. The only way you can do that is if the central bank is the only buyer of bonds. In that scenario, what happens to the currency in the FX market?

  • Geoff

    Speaking of dumping bonds:

    BFW 09/04 13:37 Pimco Total Return Had $7.7b Redemptions Last Month: Morningstar

    BFW 09/04 15:12 Pimco Total Return Loses 14% of Assets in Four Months Amid Rout

  • http://brown-blog-5.blogspot.com Tom Brown

    I agree about QE, those are the facts. But QE was a set quantity purchase.

    I’m not saying it’s a good idea, that it’d be easy or advisable, or any of that… but it seems to me that if the Fed really wanted to target 10 yrs they could do it…. by buying and selling 10 yrs…. especially on the buy side, because they have unlimited resources to do that. If they have 0 inventory of 10 yrs to start out and want to push the price lower (yields higher) that might be a problem. But starting out they essentially have infinite $.

    It sounds like you’re saying they really should think twice about that because of unintended consequences… especially in a situation such as you described… targeting 2% when inflation was running 5%. I suppose if they make the whole economy unravel due to targeting the wrong thing, this makes it practically impossible, but I have no idea if the case you mentioned is an example of that.

  • Suvy

    You’re right, that the Fed could technically target the 10 yr. That being said, I think it’s a terrible policy for the possible things that could go wrong.

  • Geoff

    The Fed is in the business of targeting rates. They have always targeted the short term rate. To do the same with the 10yr doesn’t sound like a huge stretch.