As Datamonitor had predicted, the US economy is experiencing a slow-growth recovery. Consumer spending has remained strong despite worsening employment. With business spending still weak, it’s unlikely that consumers can keep buying forever. Even so, the likeliest outcome for Q3 is further moderate growth: in the region of 2-2.5%.
US economic growth in Q2 2002 was 1.1%.
The US economy grew by 1.1% in Q2 2002, down from 5% in Q1. But while some say the recovery is losing momentum, it never really had any: the Q1 growth rate was a mathematical quirk due to the end of the inventory run-off.
Rather, the new numbers are in line with the economy improving very slowly – and with Datamonitor’s predictions that business investment would remain sluggish while consumer spending remained strong. The fate of the economy for the second half of the year depends on the direction of these two key forces.
Consumers have saved the economy – Q2’s growth was largely driven by a 1.9% rise in consumer spending. However, the employment situation continues to deteriorate. There were 403,000 new claims for unemployment in the last week of August, bringing the unemployment rate (which is expected to reach 6.4% before turning the corner) up to 5.9%.
Meanwhile, corporate accounting scandals have dragged equities markets down – nailing people in their wallets and in their optimism. To dismiss the risk that consumers will cut back on their spending is roughly equivalent to believing in 2000 that the bull market would never end.
For businesses, profits were up 1.7% in Q2, but spending decreased slightly. Businesses reduced spending on their places of business by 17% and increased spend on software and equipment by 3.1%, reversing an 18-month decline. IT firms are benefiting from the fact that many systems require ongoing investment, as software needs updating and equipment replacing.
The news on inflation is positive. The CPI-U (urban inflation index) rose 0.1% in July: small enough that an interest rate hike is not on the cards, but high enough that deflation isn’t an immediate worry. The Fed can’t make things better, but at least it doesn’t have to make them worse.
Overall, if consumer spending holds – and just because it can’t last forever doesn’t mean it won’t last for the next quarter – Datamonitor expects GDP growth of 2-2.5% for Q3.
Related research: Datamonitor, Industry Review: Financial Services (BFFS0180)
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