Data released in August by the U.S. Commerce Department revealed that consumers were spending more than expected on a broad range of products and services. Such news is viewed as positive for economic growth since what consumers spend represents two-thirds of the country’s economic activity, as measured by GDP.
Then a few days later in August, the U.S. Labor Department released a closely watched productivity report, which measures output per worker. The data released by the Labor Department showed some contrast to the consumer spending report from the Commerce Department. As consumers were spending more, productivity was actually declining, falling 0.5 % for the second quarter, making it the third consecutive quarterly decline and the longest stretch since 1979.
Slightly increased wages over the past few quarters may have led to a rise in consumer spending, which is logical if workers are earning a little more. But what is of concern is that wage growth has outpaced productivity growth over the past couple of quarters, meaning that company earnings may start to decrease. Productivity has increased at an annual rate of less than 1% in each of the last five years, suggesting that economic growth may be decelerating.
A measure of the amount of monetary funds available in the economy, known as the money supply, is an important gauge as to the health of the economy and an indication of where inflation and interest rates are headed. Historically, when rates have gone down, consumers have saved less. But this time is different as consumers have actually been saving more, thus contributing to the decline in the velocity of money in the economy.
The Fed monitors inflation as a trigger to raise rates. Traditionally, inflation occurs because there’s too much money in the economy that is available to buy the same amount of goods and services. The total money supply and the speed at which money circulates throughout the economy is known as velocity and is indicative of money movement throughout the economy. Velocity can be used to gauge economic strength and people’s willingness to spend money. This means that when there are more transactions being made, then velocity increases and the economy is likely to expand. Conversely, lower velocity may indicate a slowing or contracting economic environment.
The activity of the Fed is especially of interest to investors now as the market has become sensitive to the timing of the next rate hike. Eyes are on the calendar date of September 21st as the next likely date for a possible rate hike. Volatility will rise this week as traders engage in risk mitigation behavior and either close out or hedge their current positions.
Sources: U.S. Department of Commerce, U.S. Labor Department, Fed