The past two days have seen some concerning consumer spending reports. The WSJ reported today that “Target Corp., Home Depot Inc. and Macy’s Inc. joined a parade of consumer-focused companies in warning that sales gains will continue to be slow, especially in the year’s first half. Consumers remain reluctant to open their wallets with unemployment stubbornly high and home prices falling and unlikely to turn up soon, executives and economists say. While business purchases and other indicators point to an improving economy, unemployment is now at 9.7% and expected to fall only gradually over the next two years.”
With consumer spending not looking good, inventory build up will probably tapper out from fourth quarter growth. The question becomes: what will drive Q1 2010 spending? The last quarter was 63% inventory build up and that won’t be the case for this quarter. The third quarter of last year was primarily auto sale supported through the cash for clunkers program. But auto sales plummetted after that program ended and cut back fourth quarter GDP by 10%, so it won’t be there either.
Housing was big in the third quarter of 2009, and it’s decline in December was seasonal. So it could be that residential sales are the driver for this quarter. It is even more likely since the first-time homebuyer credit must be used by April and will concentrate residential spending this quarter. On the flip side, January is still an unseasonal month to build homes, and new homes sales fell 11.2%, erasing pretty much all housing start gains from 2009. So that may not be where growth comes from. And so goes housing, so goes the economy.
At this point we can pretty safely assume that GDP will be well below the 5.7% number (that has yet to be adjusted) from Oct. to Dec. of 2009.