17 Sep 2004 Despite Much, Economy Continues Growth
The slow-down of the second quarter appears to be behind us. Retail sales, excluding autos, rose for the fourth month in August. Consumers remain cautious largely due to oil prices, but they continue to spend nevertheless. Same-store retail sales were up 1% in September. Consumer spending, which represents two thirds of the economy, rose at a 1.6% rate during the second quarter. The consumer should remain healthy as the acceleration of job growth numbers will continue to improve income and confidence.
On the business side, reports are mostly encouraging as well. Manufacturing accelerated in August and September. Industrial production rose .1% in August as factory output increased for the seventh time this year, according to Bloomberg News. The New York Fed reported a healthy rise in its index of manufacturing to 28.3 this month from 13.2%. It was the biggest rise since June of last year.
TheU.S.budget deficit was $41.1 billion in August, considerably smaller than last year’s August deficit of $76.6 billion. Tax receipts were larger than expected due to the strengthening economy. The final deficit number may be even smaller than the year-to-date number as September is typically a surplus month given the huge inflow of taxes for the third quarter.
While the deficit is rich fodder for political and economic debate, it is important to keep it in perspective. The current deficit related to the size of the current economy is well below previous highs at 3.4% of GDP. During 16 of the past 75 years the deficit exceeded 4% of the country’s economy. During WWII the deficit soared to 28% of GDP, but by 1946 it had fallen to 7.2%. A year later a booming post-war economy generated a surplus of 1.6%.
The U.S. economy remains the strongest grower of our major trading partners fueling continued trade deficits. Oil is the major component driving the U.S. current account deficit to record highs. The shortfall is equivalent to 5.7% of the nation’s $11.6 trillion economy, up from 5.1% in the first quarter.
The economy is settling into a slower pace of growth than was experienced during the early recovery of last year, but it is growing nonetheless. As expectations come down and stock prices adjust we expect to see lower volatility and improving prices once the election is behind us.