Monday, September 1, 2008

The Week Ahead - Two Different Economies, Gustav, New Economic Data

Over the weekend, there were several articles written pointing to the U.S. having "dual economies". The two economies that the articles pointed to were one for businesses and one for consumers.

"Evidence of this divergent economy keeps building -- the average consumer is suffering, but business spending, particularly abroad, appears to be keeping the U.S. economy from sinking severely, even as the financial sector continues to struggle."

This week the Institute for Supply Management is expected to report that both manufacturing and non-manufacturing sectors saw flat activity August versus July. While this may not seem like much, the sectors have seen contraction over the past year, so a stabilization or growth would be considered very good news. This is much like the housing sector in that flat numbers would be a positive over the current negative trend.

The most important report for the week may be Friday's labor report from the Labor Department. This will show the health of the business sector, and it will also give an insight into the consumer sector. Most economists believe the job losses will reach 75,000 for the month with 500,000 for the year. A raise like this would most likely also mean a 0.1% raise in the unemployment rate to 5.8% - still very low by historical standards.

Even with all of the issues regarding the potential of Hurricane Gustav, energy prices, consumers and financials, the economy still looks to be holding up.

We have had a revised GDP figure of 3.3% for the 2nd quarter which was much, much higher than anyone anticipated. Then the durable goods report came at 1.3% which was also dramatically higher than projected. Where has this economic activity come from?

Well, businesses and exports. Exports made up the largest part of the GDP increase. This is partly because of the weak dollar, and partly due to growing economies overseas. Businesses also played a major role as commercial aircraft was a strong point of the durable goods report.

What does this mean for our economy going forward? There are several economists that believe the rise of the consumer has peaked. From the 1980's forward, every year the consumer has been growing as a part of GDP from around 65% to 70%, but this looks to have changed.

Businesses and exports have started to rise. This is going to be partly due to the growth of the global economy with China, India, and other emerging markets started to buy goods from the U.S. that they could not get elsewhere. Also, it cannot be said enough how much the weak dollar has helped the U.S. export market. It is cheaper for other nations to buy our goods, and with the dollar strengthening slowly, this should continue.

Businesses continue to spend on technology to gain an even more productive workforce. It looks like the excesses that have at times been in place in the business world have finally been cut, so most companies are leaner than they once were. This means that when something is needed they are not cutting from one area to spend in another. Instead, they start purchasing the materials/technology needed, and they look for efficiencies to be maintained and gained.

The business world and consumer are not on divergent paths since one will move back towards the other. The main thing that will need to continue is that corporations must have the profits/capital for them to spend. According to many economists, if corporations had a lower tax rate, like those in Europe, this would leave more capital to be spent on materials, expansions, technology, and most importantly workers (i.e. consumers).

Sources: Yahoo!, AP, Reuters

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