The Economy's Negative Weakening Status

GDP Report: The Economy Not as Strong as it Appears

November 7, 2013

Cnn.com

By Annalyn Kurts

The Economy's Negative Weakening Status 

Although it appeared as though the U.S. economy perked up a bit this summer, as stores re-stocked their shelves, consumer spending rose slightkly, and the housing recovery chugged along.Gross domestic product -- the broadest measure of economic activity -- rose at a 2.8% annual rate in the third quarter, according to the Bureau of Economic Analysis. That marked the fastest growth in a year and was stronger than economists had anticipated. However, the gross domestic product report can be deceiving.

"In reality, it's a weaker report than it looks on the surface," said Adolfo Laurenti, deputy chief economist for Mesirow Financial. An added .8 percentage points to gross domestic product was in itself a surprise. When inventories, like these,  build up, it can mean two very different things: 1. Businesses have a valid reason to expect the demand for products to increase, in the future, so they stock their shelves in advance, or 2. The demand is weaker than they expected,  and the goods already ordered tend to linger on shelves. 

Laurennti believes it is a latter case. Growth is slowing into the end of the year as people range and complain about the absurd amount of money they spend on groceries and holiday gifts."When we see recent reports by retailers that sales are not as strong as we were expecting for back-to-school and sales for Halloween are a little bit softer than we were expecting, I have reason to believe the accumulation in inventories is mostly unexpected and not good news," he said. "Unless of course, people expect gangbuster sales for Christmas, which quite frankly, I don't think is in the data either."

Uncertainties about economic growth and government policy are holding them back from investing, said Sung Won Sohn, economist at California State University Channel Islands.

"Until the latest report, businesses had been trying to boost productivity by using the latest technology saving labor," he said in a research note. "Unfortunately, they seem to be losing confidence in the future course of the economy putting equipment purchases on hold." 

However, a few good things came out of spending on housing and commercial real estate. Federal budget cuts have been holding back economic growth for four quarter. Nevertheless, over this past summer, the state and local governments have increased their spending and investments enough to compensate for federal cuts. It is unclear whether that will continue. This report does not yet reflect the government shutdown in October, which put thousands of federal workers temporarily out of a job and halted some government work for 16 days.