U.S. Economy: No Imminent Recession But A Dire Warning Nonetheless


Milton Ezrati, Senior Contributor, Forbes 

Nov 1, 2019


GDP growth for the third quarter came in slightly slower than was recorded for the spring quarter, continuing a six month deceleration from the strength the economy showed coming into this year. Though this picture is far from the strong economy promised by the real growth surge witnessed in 2017 and 2018, it would be a mistake to extrapolate the slowing trend into a near-term forecast of recession. The report, however, by recording weakness in capital spending, does contain an ominous sign for the longer run, and that deserves the attention of all.


The overall picture, though far from strong, is hardly threatening. Overall real GDP during the third quarter grew at a 1.9% annual rate, hardly much difference from the 2.0% annual rate averaged in the spring quarter. Though quite a bit slower than the 3.1% growth recorded in the opening quarter of the year, this latest figure is far stronger than the 1.1% growth rate averaged in 2018’s final quarter. Abstracting away from the distorting effects of retailers and wholesalers as they build and sell off their inventories from one period to the next, the so-called “final sales” figure of GDP offers a similar picture of speedups and slowdowns. The 1.9% real growth in final sales during the summer quarter (in this case the same as overall real GDP) fell far short of the 3.0% averaged in the spring quarter and the 2.6% averaged in the first quarter. It nonetheless looks impressively strong next to the 0.7% annual rate averaged during last year’s second half. What both these measures show is that the economy has strength and weakness from one period to the next but on balance offers solid if somewhat disappointing real growth.


Other aspects of the report also warn against any rush to forecast recession. Such a dire event is not likely to occur while the household sector remains strong — and it is indeed strong. The Commerce Department reports that real consumer spending, more than two-thirds of the entire economy, increased at almost a 3.0% annual rate during the summer quarter — down to be sure from the powerful 4.6% rate averaged during the spring quarter but far above the 1.2% rate of advance averaged during the prior six months. More significantly, real household income after-tax grew at almost a 3.0% annual rate during the summer quarter, an acceleration from the 2.4% pace of the spring quarter, both because more people are working and because hourly and weekly wages rose over this time. With households still saving over 8% of their after-tax income, this latest raft of figures suggests that personal finances have actually strengthened during this most recent period, though specifics will have to wait for a Federal Reserve report due out in another month or so.


Part and parcel this still strong household sector is how home buying increased in the summer quarter. The GDP accounting noted a 5.1% annualized real rate of growth. This strength follows declines on balance during the prior four quarters. It should encourage further that this positive turn reflects improved affordability fundamentals: It is easier now for the average American to support a mortgage on the average home. Not only have household incomes expanded while housing prices have stalled or actually declined in many regions of the country, but mortgage rates have come down in response to Fed’s interest rates cuts. On these bases, housing should grow for some quarters to come, making a sudden recessionary move unlikely.


The ugly spot in this report lies in business spending...