This Bloomberg report from Carlos Torres and Catalina Saraiva on April 12, 2013 highlights some good news about the U.S. economy. Despite gridlock and an increase in the payroll tax, consumer spending was quite resilient and they expect economic growth of 3% of real gross domestic product. Real gross domestic product measures economic activity with adjusting for inflation. If these estimates prove to be accurate, then that will be surprising news. However, the Bureau of Economic Analysis will release their first estimate on April 26th.
If this economic performance proves to be accurate and it can be sustained throughout the rest of the year, it will be a welcomed relief if the momentum of the first quarter extends through the rest of the year. What is often misunderstood is that actual economic performance is usually a result of past events. Due to a sustained recession and slow recovery, industry has been slow to build up capacity. That will soon change if they think that greater consumer demand will be sustainable.
There are two events that can explain why consumers are spending despite an increased tax burden and a sluggish labor market. First, housing is on the rebound with both home sales and prices rising. When people are buying homes, that leads to more spending with household appliances and new furniture is needed to fill up their space. This also enhances the wealth of those selling homes because they are receiving higher prices. Then there is strong performance of the stock market where its improved rate of return is boosting overall wealth. When their stock portfolio rises in value, then households are more opt to spend. Economists call this the wealth effect.
The quick improvement in growth prospects also speaks to the labor flexibility built within the U.S. economic system. While Americans certainly do not appreciate how firms are quick to fire workers when economic prospects take a turn for the worse, firms are also able to quickly reverse their actions when the economy brightens. This can be attributed to our economic system where it is less burdensome for firms to hire and fire workers. That is in contrast to Europe where worker protections make it harder for European companies to lay off workers. Even though it softens the blow during economic downturns, they are more reluctant to hire workers when an economic recovery starts to emerge. That is one of the reasons why the U.S. has been more resilient in recovering from the financial crisis than Europe.
We can draw some optimism from this news, but it is still premature to say that we are out of the woods. The impact of the sequester will not be fully felt until the second and third quarters of 2013. Then there’s the uncertainty from events in North Korea. However if the impact from those two events are less than expected, then we might see the U.S. economy perform above expectations.