New re­ports are cause for con­cern

Daily Local News (West Chester, PA) - - BUSINESS -

IN­DI­CA­TOR » Au­gust Spend­ing and In­come and Septem­ber Con­sumer Con­fi­dence KEY DATA » Con­sump­tion: +0.1 per­cent; Dis­pos­able In­come: +0.1 per­cent; Prices: +0.2 per­cent/ Con­fi­dence: -1.7 points IN A NUT­SHELL » “Slug­gish con­sumer spend­ing points to a weak third quar­ter growth number.” WHAT IT MEANS » This week we re­ceived the final (for now) re­vi­sion to third quar­ter GDP growth and the slight rise came from im­proved house­hold con­sump­tion. It looks like the econ­omy slowed sharply this quar­ter, in no small part be­cause of a soft­en­ing in con­sumer de­mand. Con­sump­tion ticked up in Au­gust, but when it was ad­justed for in­fla­tion, it was actually down.

Weak­ness in durable goods sales, ba­si­cally mo­tor ve­hi­cles, off­set some in­creases in non­durables and ser­vices de­mand. The hur­ri­canes were not help­ful. But the un­cer­tainty about con­sumers is not limited to the wrath of Mother Na­ture. Dis­pos­able per­sonal in­come, while ris­ing mod­estly, was also off when in­fla­tion was taken into ac­count. It is hard to spend more when your pur­chas­ing power de­clines. Wage and salary growth pretty much dis­ap­peared and that does not bode well for fu­ture re­tail sales.

An­other warn­ing sign is the sav­ings rate, which edged down­ward again. Sav­ings have de­clined five out of the last six months. On the in­fla­tion front, prices rose mod­er­ately overall but min­i­mally when food and en­ergy were ex­cluded. The yearover-year in­creases in both the head­line and core num­bers are be­low 1.5 per­cent. Given the Fed’s tar­get is 2 per­cent, there is a lot of room for prices to rise be­fore the Fed has to worry about in­fla­tion.

De­spite the chaos in Wash­ing­ton, the fail­ure to re­form the ACA and hor­ri­ble hur­ri­canes, con­sumer con­fi­dence re­mained pretty high in Septem­ber. The Univer­sity of Michi­gan’s Con­sumer Sen­ti­ment in­dex did de­cline, but the level is strong. For most peo­ple, the hur­ri­canes hit some­where else and while there was con­cern for those who were hit by the storms, the im­pacts were not felt di­rectly by most Amer­i­cans. Thus, con­fi­dence did not tank. MAR­KETS AND FED POL­ICY IM­PLI­CA­TIONS » It looks like the econ­omy fell back to its normal growth rate, or even lower, in the third quar­ter. We don’t have the Septem­ber num­bers, but given the hur­ri­canes, it is likely that con­sumer spend­ing will come in at half the 3.3 per­cent pace posted in the spring. But eyes are now turn­ing to tax re­form/tax cuts and the ad­min­is­tra­tion’s pro­posal has al­ready come un­der in­tense fire since there are lots of win­ners and losers. That is al­ways the case

with any changes in pol­icy. But the ma­jor is­sue is the im­pact on the deficit.

Work­ing back­wards, the sup­port­ers have come up with a growth rate that im­plies the plan will pay for it­self. If you be­lieve that, I have both a Broad­way show that I am pro­duc­ing and a bridge I am sell­ing and you can have as much of each as you like.

But it is not just bo­gus

growth es­ti­mates that cre­ate risks to the plan. It provides sig­nif­i­cant tax breaks for up­per in­come house­holds, some­thing the ad­min­is­tra­tion pledged not to do. By elim­i­nat­ing the state and local tax break, it cre­ates the like­li­hood that up­per-mid­dle-in­come house­holds will see their taxes rise not fall. And if the past is any ex­am­ple of how the money will be spent, don’t ex­pect the repa­tri­a­tion of for­eign earn­ings to lead to a lot of new cap­i­tal spend­ing.

You can ar­gue for or against all of the changes in the plan but they will cre­ate ma­jor dis­agree­ments. The one good thing is that the bat­tle for tax re­form/tax cuts has be­gun, though I sus­pect we will wind up with some cuts and not a lot of re­form.

Joel L. Naroff is pres­i­dent and chief economist of Naroff Eco­nomic Ad­vi­sors. He can be reached at 215-497-9050 or joel@narof­fe­co­nomics. com. On the Web: www. narof­fe­co­nomics.com.

Joel Naroff Colum­nist

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