Poor Consumer Spending and Fixed Real Estate Figures Contribute to Sluggish Q3 GDP

The latest revision to the United States’ second-quarter GDP figures is discouraging. The top-line annualized growth rate decreased by over 20 percent, dropping from a previous reading of 1.7 percent to just 1.3 percent. In other words, the economy’s output during the second quarter of 2012 was $16 billion lower than previously estimated.

Poorer-than-expected personal consumption and fixed real estate investment figures share the blame for this slump. This year, America’s consumers simply aren’t spending like they were in 2011, when personal consumption posted monthly year-over-year increases of 6 percent or more for much of the year.

Over 70 percent of the United States’ gross domestic product can be tied back to consumer spending. As long as personal consumption figures remain anemic, the American economy is unlikely to flourish.

This is a troubling development for the country’s homegrown businesses, particularly those without much exposure to faster-growing overseas markets. The country’s manufacturing renaissance is directly attributable to export growth, which in turn has been fueled by developing-world demand for specialized finished products like cars, trucks, medical devices and cutting-edge electronics.

For instance, this new report indicates that motor vehicle production tacked 20 basis points on to the top-line second-quarter growth rate. The recent economic resiliency of manufacturing-dominated Rust Belt states like Ohio and Michigan stands in stark contrast to the perennial gloom that has settled over service-sector strongholds like Massachusetts, New York and California.

Until personal consumption and real estate investment turn around, most non-manufacturing businesses will struggle to grow. To spur retail sales, state and local governments should consider declaring medium-term tax holidays after the traditional end-of-year retail spending boom.

To entice more small businesses back into the empty storefronts that line the streets of many small towns and medium-sized cities, local chambers of commerce should fund business incubators. To infuse this timid recovery with some real momentum, hesitant would-be entrepreneurs must be convinced that the future is not something to be feared.

October 3, 2012