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Strong GDP Report 'High Watermark' for U.S., Not Sign of Upturn, Economist Says

Posted Aug 29, 2008 06:00am EDT by Aaron Task

Updated from 6:00 a.m. EDT

Lost a bit amid vacations, stay-cations and the Democratic convention, a series of reports this week have shown the U.S. economy to be in not as terrible shape as many believed.

A trio of reports Monday and Tuesday showed some glimmers of hope that the housing market's descent has slowed - a key first step toward a bottom (however tentative.)

Wednesday and Thursday brought more unambiguously positive data - at least the headlines - in the form of stronger-than-expected reports on July durable goods and second-quarter GDP.

But "don't get too excited" about the data, says Joseph Brusuelas, chief economist at Merk Investments, a California-based mutual fund family with over $430 million of assets under management.

Update: As Brusuelas predicted in the accompanying video, Friday's personal income and spending data marked a "180 degree" turn from the strong reports earlier in the week.

  • Personal income fell 0.7% in July, the sharpest decline since after Hurricane Katrina in August 2005. The consensus was for income to stay flat last month.
  • Consumer spending rose 0.2%, as expected. But that's the slowest gain since February, and spending dropped 0.4% on an inflation-adjusted basis, the biggest slide in four years.
  • The personal consumption expenditures index rose 4.5%, the steepest since February 1991. Core PCE rose 2.4%, the biggest gain since February 2007 and well above the Fed's "comfort zone"; but don't expect a rate hike anytime soon, as Brusuelas and I discuss in the accompanying video.

As with other economists, Brusuelas notes the 3.3% second-quarter GDP figure was goosed by the one-time factor of tax rebate checks. There will be a "payback" for the fiscal stimulus in the third- and fourth-quarters, the economist says, predicting a very soft holiday shopping season.

Second-quarter GDP got an even bigger boost from export growth, which may wane as the dollar has strengthened and the global economy has slowed.

For these and other reasons, most notably higher inflation, Brusuelas believes the second-quarter GDP will prove to be the "high watermark" for the U.S. economy until the second half of 2009. He predicts a "weak recovery" will then ensue.

One risk to Brusuelas' already tepid outlook: A Barack Obama victory in November, as discussed here.

28 Comments

Yahoo! Finance User
Yahoo! Finance User - Friday August 29, 2008 11:51AM EDT

These are not natural cycles, and this one especially is not. The world is many feet above their heads in dollars. After USSR collapsed two hundreds millions run for dollars. China and India gave another several hundred millions. Currency accounts for oil and other natural resources trading are loaded with dollars. Guess why Paulson were running through the world. Because those people, funds, countries are loosing interest in dollars. If they will throw the money back to USA the current loses of dollar will be nothing comparing to you’ll see.

RobertK
RobertK - Friday August 29, 2008 01:19PM EDT

Nothing you said indicates that this isn't natural. What do you think natural means? That it doesn't have a cause? All recessions have a cause! The business cycle is a natural response to that cause. Now that the weak dollar is making oil very expensive, we are using much less and innovation in alternative fuels has exploded. Do you see how the weak dollar is forcing us to FIX the problem? That is how natural business cycles work.

marktaichen
marktaichen - Friday August 29, 2008 03:17PM EDT

tech ticker as a contrarian indicator? i dont think it's that widely followed. although he did get to speak to korean president, how did that happen? koreans are really online all the time i guess.

Yahoo! Finance User
Yahoo! Finance User - Friday August 29, 2008 03:37PM EDT

You can produce as much alternative energy as you want, it will not fix problem because people do not have money to buy it. Another overproduction, price on energy will go below of cost of production. Overproducers will take losses and close production or bankrupt. Any way investors will be screwed, like it happened with farmers building small ethanol shops. They bankrupt, big manufactures bought auctioned ethanol shops. Wealth displacement became even bigger. There is nothing natural in this crisis, and last semi-cycles. It’s not natural to ride alone a huge SUV or 2 tons track that takes twice as much gas as a normal car, or more. The demand on SUV was artificial through psychopathic marketing campaign and people’s mental problems. The grows 2003-2007 is artificial trough abuse of credit system. The .com-market crisis was artificially created through future stock price inflation mechanism created by wall street (proved, many investment banks agreed on penalty).

Yahoo! Finance User
Yahoo! Finance User - Friday August 29, 2008 03:38PM EDT

You can produce as much alternative energy as you want, it will not fix problem because people do not have money to buy it. Another overproduction, price on energy will go below of cost of production. Overproducers will take losses and close production or bankrupt. Any way investors will be screwed, like it happened with farmers building small ethanol shops. They bankrupt, big manufactures bought auctioned ethanol shops. Wealth displacement became even bigger. There is nothing natural in this crisis, and last semi-cycles. It’s not natural to ride alone a huge SUV or 2 tons track that takes twice as much gas as a normal car, or more. The demand on SUV was artificial through psychopathic marketing campaign and people’s mental problems. The grows 2003-2007 is artificial trough abuse of credit system. The .com-market crisis was artificially created through future stock price inflation mechanism created by wall street (proved, many investment banks agreed on penalty).

Yahoo! Finance User
Yahoo! Finance User - Friday August 29, 2008 03:38PM EDT

You can produce as much alternative energy as you want, it will not fix problem because people do not have money to buy it. Another overproduction, price on energy will go below of cost of production. Overproducers will take losses and close production or bankrupt. Any way investors will be screwed, like it happened with farmers building small ethanol shops. They bankrupt, big manufactures bought auctioned ethanol shops. Wealth displacement became even bigger. There is nothing natural in this crisis, and last semi-cycles. It’s not natural to ride alone a huge SUV or 2 tons track that takes twice as much gas as a normal car, or more. The demand on SUV was artificial through psychopathic marketing campaign and people’s mental problems. The grows 2003-2007 is artificial trough abuse of credit system. The .com-market crisis was artificially created through future stock price inflation mechanism created by wall street (proved, many investment banks agreed on penalty).

Yahoo! Finance User
Yahoo! Finance User - Friday August 29, 2008 09:49PM EDT

We have become a nation of borrowers and spenders. Savers are in short supply. Interest rates discourage saving and have for some time. The fed wants inflation which destroys wealth. Savers are further penalized. The only way the fed can handle our accumulated debt of trillions is to outsource the debt; after all they have destroyed the american saver's ability to provide the resources to purchase our own debt.

David
David - Saturday August 30, 2008 10:48PM EDT

@James L, please define greedy.

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