We are still a few days away from getting US GDP data for the second quarter (the preliminary data will be released next Wednesday, the 31st), but the consensus estimate is that the economy grew at an annualized rate of only 0.5% during the last quarter. One of the main reasons for this lackluster performance is sluggish aggregate demand. Put simply, consumers are not spending heartily enough to drive faster growth in the overall economy.
The monthly retail sales data that is compiled and reported by the Census Bureau bears this out. The average growth rate for total retail sales was about 0.4% per month in the second quarter, but when you exclude sales of autos, the average growth rate drops to 0.1% per month. So it appears that Americans are buying cars, but due to a low savings rate and slow growth in household incomes they are not expanding their purchases for much of anything else.
Replacement sales are supporting the spending data for many types of consumer goods. A large number of autos, appliances, and home furnishings have not been replaced since the recession ended, and many of these items are now starting to wear out. This replacement spending will support some modest growth in the overall production data during the second half of the year, so the gradual improvement in the manufacturing sector will persist.
But as I said earlier, we are going to need some robust growth in consumer spending if we are to have any chance at an accelerating recovery. All of the ingredients are in place for this to happen, but it will likely take another quarter or two for them to kick in.
Housing will continue to be the driving force in the recovery, so keep your eye on the trends in the data for new housing starts and home prices. Interest rates remain low, and the stock market is enjoying a nice bull run. These are important leading indicators of future economic growth, and they all portend increased economic activity in the coming quarters. So barring any unforeseen shock in the global economy, the US economy will start to recover in earnest by the end of this year and throughout 2014.