The Markets

It’s déjà vu all over again!

Last year, pundits and analysts tried to discern when the Federal Reserve might begin to end quantitative easing by reading economic tea leaves. For months, bad economic news proved to be good news for stock markets. This year, investors are seeking signs which might indicate when the Fed will begin to raise interest rates and, once again, bad news has become good news. Last week’s weaker-than-expected unemployment report helped push U.S. stock markets higher, according to Reuters, because it was interpreted to mean the Fed would not raise rates soon. 

The week before, the Commerce Department announced household spending slowed during July. Consumer spending was up just 3.2 percent annualised through mid-summer which is the smallest increase in spending in five years. As it turns out, spending fell because Americans are saving more. During July, households set aside 5.7 percent of income, on average. While that’s good news with respect to American households’ financial security, it’s not such good news for U.S. gross domestic product, according to Barron’s:

“Unfortunately for the U.S. economy, a penny saved is not a penny earned. While the decision by Americans to cut back on their profligate ways isn’t necessarily a bad thing – it was spending beyond our means that helped spur the Great Recession in the first place – it’s only consumer spending, not saving, that counts when computing gross domestic product. So when consumers spent less in July than they did in June, it caused economists to ratchet down their third-quarter economic-growth forecasts which now sit below 3 percent.”

Meanwhile, here in the UK, we have seen a 0.8 percent rise in household consumption in q1 2014, double the pace of the previous quarter, providing most of the 0.8 percent increase in GDP.

“That increase has been largely funded by rising employment, rather than by consumers saving less. So the sources of growth seem sustainable and we continue to expect the recovery to broadly maintain its current pace” said Samuel Tombs, an economist at Capital Economics.