The GDP Formula + Factor 1 (the consumer)

So what makes up GDP? It's essentially a 4 part formula that is really dependent upon 2 parts.

GDP = Consumer spending + Business inventory increases/decreases + Import/Export Surplus/Deficit + Government Spending

A couple of points to consider:

(1) Consumer spending tend to account for about 70% of GDP and is the main driver

(2) If consumers aren't spending, businesses and companies won't stock more Gatorade, cool shoes, or Ipods in their stores, on their shelves and in their back rooms. If businesses aren't increasing their inventory, then the manufacturers (Gatorade, Nike and Apple) aren't selling products.

(3) When the economy stinks, the dollar is weak (worth less around the world). This is good in the sense that it means other people can buy are stuff (ipods, etc) for cheaper $. Thus, our exports will increase and hopefully outweigh our imports. Basically, this means more $ coming into the US than going out and a rise in GDP.

(4) Government spending can be ANYTHING. This is scary and somewhat misleading. Hurricane Katrina recovery programs = government spending = higher GDP. $800 billion stimulus = higher GDP. While government may contribute to a higher GDP, most don't consider it a healthy GDP if this is the main driving factor.

So let's consider the current economic climate + specifically the 1st factor (the consumer) amidst all of this:

You have a hurting consumer who is scared of losing his job or already lost it. This same consumer may be feeling better nowadays though since the market is skyrocketing. Maybe their 401(k) is somewhat replenished after being decimated by 50%. And perhaps their business hasn't talked about layoffs since March. Plus, holiday season is around the corner. On the other hand, this consumer DECREASED his spending in the 2Q of 2009 by -1.2%. Again, a positive GDP STRONGLY DEPENDS UPON a spending consumer. Recent reports have indicated that consumers INCREASED spending by 0.3% in July. However, after adjusted for inflation, consumers actually DECREASED their spending by -0.1%. Either way, more spending is going to be necessary to help encourage businesses to restock inventory and get GDP back into positive territory for 3Q 2009. The current savings rate for the US consumer is approximately 5%. Will this go up or down? Will increases in the cost of gas for the car decrease discretionary spending at Nike and Apple? Will unemployment continue to rise and further constrain consumer spending?

The current unemployment rate is at 9.5% and is expected to rise to 9.7% as of tomorrow's report. However, the UNDERemployment rate is currently estimated at 16.5%. Underemployment means that a person may not be unemployed but is working part-time to compensate. Thus, they're making less than they were currently living off of. Thus, they'll have to adjust their life and habits to a more modest income level - which means less discretionary spending. Consider that the average work week decreased recently to 33 hours. This is the lowest on record (which goes back to 1964). This means that employers aren't firing everyone. They're simply reducing hours in the work week and reducing salaries to compensate. Or they're switching employees to part-time, which would drag down the normal 40 hr work week average of US employees moreso. Either way, this represents people - part time workers. And these people will be rehired at full-time status before any new employees are hired by a company. It's smarter. It's more efficient. And it appears fair to those employees who had their hours and salary cut. So the problem of unemployment and underemployment appears to be lingering and is likely to be around through 2010, with most economists expecting high unemployment (7-8% range give or take) into 2011.

Last, without much detail, consider that current spending habits and sales are being driven by stimulus efforts (the Cars for Clunkers and various home repair rebate programs). Sure these may help encourage consumer spending, BUT it does so at the expense of future sales. You can't have a person that buys a new car now AND in 18 months. No, the program may encourage a buyer to buy now and help sales now, but only at the expense of sales 18 months from now. So even if the consumer does come out in full force for 3Q 2009, do we think he'll be there throughout 2010? And if not, does that further point to a second [significant] dip in the stock market?