The mid-year economic ‘soft patch’ now looks like a more serious matter …
A number of economic indicators for June had identified a “soft patch” in the economic expansion, a lull that appeared both minor and temporary to a wide range of observers --including Fed Chairman Alan Greenspan. However, data received during the past few weeks suggest that the mid-year slowdown has turned out to be more serious than expected by private forecasters, the Administration and the Federal Reserve.
The first big shoe dropped on June 30 when the Commerce Department released the “advance” report on Gross Domestic Product (GDP) for the second quarter. This report showed annualized GDP growth of only 3.0%, well below market expectations, and revealed a major slowdown in growth of consumer spending — to only 1.0%. Furthermore, data released a few days later showed that the real value of consumer spending weakened badly during the second quarter, and actually contracted by 0.9% in June. That pattern certainly does not bode well for economic momentum moving into the third quarter of the year.
The other big shoe dropped on Aug. 6 when the Labor Department released the employment report for July. Contrary to consensus expectations, payroll employment was revised down by 61,000 for the May-June period, and the July increase was a paltry 32,000 (market consensus was around 240,000).
It’s true that the household survey showed a slight reduction in the unemployment rate (from 5.6% to 5.5%) and strong growth in household employment (629,000). However, notorious volatility in the household employment estimates kept this number out of the headlines while the payroll employment numbers (based on a survey of business establishments) rightfully captured most of the attention.
The falling shoes are terrible news for the Bush Administration and major complications for the Greenspan Fed. Is Greenspan’s “soft patch” just a bit softer than expected or did the economy hit some dangerous quicksand in the middle months of 2004? NAHB’s forecast still shows GDP growth around 4% for the second half of the year, but the range of risk around that forecast certainly has widened.