Rosenberg: Strong GDP figures mask a deteriorating economy
Rising GDP figures painting the picture of a strong U.S. economy are all smoke and mirrors, according to economist David Rosenberg.
Last quarter, the U.S. economy expanded at an annualized rate of 2.8%, double the rate of the previous quarter and well above economists' forecasts of 2.1%.
Although the numbers look strong on the surface, a deeper dive into the data reveals a more troubling picture.
According to Rosenberg, about 80% of that growth “came from three sources: savings rate drawdown, the beloved government sector, and inventory building.”
In other words, the economy is growing because Americans are simply depleting their savings, the government is accumulating deficits, and inventory is increasing—a measure that tallies up goods that are produced but not sold.
“Outside of these—the headline would have come in at a +0.6% stall-speed pace. We shall see in Q3 the extent to which these three support mechanisms were permanent or temporary,” Rosenberg explained.
Rosenberg’s assessment is consistent with other economists, who’ve noted a gentle weakening in consumer spending this year.
GDP figures mask “profound financial difficulties”
The U.S. economy is mainly consumer-driven, so GDP figures largely reflect how much Americans spend on goods and services—regardless of where that spending is coming from.
With savings rates declining, more Americans are using revolving credit to finance their purchases. By the end of the first quarter, Americans collectively owed $1.12 trillion in credit card debt, 13% higher than in the same period in 2023.
According to EY chief economist Gregory Daco, consumer spending growth is masking “more profound financial difficulties for the bottom three income quintiles facing the strenuous combination of higher prices, larger interest burdens, and softening job prospects.”
“The economy is bifurcated into the haves and have-nots, as middle-class Americans are struggling with rising prices and lagging wage growth,” said Regan Capital’s chief investment officer, Skyler Weinand.
Even among the haves, personal finances aren’t as healthy as they were at the tail end of the pandemic. The latest University of Michigan sentiment survey showed consumer confidence plunged to an eight-month low in July, largely due to lingering inflation.
Survey director Joanne Hsu said nearly half of consumers “spontaneously expressed complaints that high prices are eroding their living standards, matching the all-time high reached two years ago.”
When consumers are less confident, they’re far less likely to spend on big-ticket items such as durable goods, which is a bad omen for the economy.
Clearly, Americans across all income brackets are struggling with a rising cost of living.
According to the Federal Reserve’s annual household survey, nearly two in three U.S. adults admitted that rising costs had worsened their financial situation over the last year. Nearly one in five said higher costs had made their living situation “much worse.”