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GDP REVISED DOWN, GROWTH IN CONSUMER SPENDING OUTPACES INCOME By Mark Lieberman, Economist for the Five Star Institute Real gross domestic product (GDP)—the output of goods and services produced by labor and property located in the United States—in- creased at an annual rate of 1.3 percent in the second quarter of 2012, down sharply from the 1.7 per- cent growth rate reported in August, according to the Bureau of Economic Analysis (BEA). The GDP report was below market expectations of no change in the growth rate and emphasized a moribund economy. In the first quarter, real GDP increased 2.0 percent, after the economy expanded at a 3.0 percent pace in the fourth quarter of 2011. In terms of economic measurement, these data are ancient history already. The advance third-quarter GDP report was released on October 26, though revised growth rates are already slated for release on BEA's calendar in subsequent months once additional, germane market data becomes available. The data released for July, August, and early September suggest no significant change for Q3 2012 eco- nomic activity, but residential fixed investment is likely to show a strong positive contribution. Residential fixed investment accounted for $7.2 billion of real GDP, down from the originally reported $7.5 billion and down from the $16.1 billion spent in the first quarter. Personal consumption spending accounted $45.4 billion while income gains dropped to just $18.5 billion. The continued second quarter. By the same measures, personal spending for the entire second quarter was up about $35.7 billion from the first quarter. Still, the monthly income-spending report showed signs of a weak labor market as wages rose just $5.5 billion in August after improving almost $8.5 billion in July. Within the goods-producing sector, aggregate wages dropped $6.4 billion, but wages increased in the service sector. Disposable personal income—essentially af- increase in spending was an encouraging sign for third-quarter GDP. Consumer spending was roughly 70 percent of GDP. In the first two months of the third quar- ter, consumer spending was up $34 billion over the ter-tax income—rose $12.5 billion in August af- ter growing $15.4 billion in July. Personal savings for August fell $47.4 billion. Personal savings as a percentage of disposable (after tax) income fell to 3.7 percent in August from 4.1 percent in July. Despite continuing low interest rates, personal interest payments (non-mortgage interest) rose to $171.7 billion in August from $169.2 in July as consumers upped their borrowing. The increase in personal consumption was for $35.7 billion, or 85 percent of the growth in real GDP in Q2, according to the final estimate, compared with 69 percent in the revised esti- mate issued one month earlier. In a separate re- port, BEA provided additional details on more current trends in consumer spending, which rose $57.2 billion—or 0.5 percent—in August. At the same time, personal income improved just $15 billion—or 0.1 percent. While the increase in spending matched economist expectations, the increase in incomes was half of what had been forecast. BEA also revised its numbers for July, which originally showed spending up $46.0 billion and incomes up $42.3 billion. With the revision, the spending increase was cut to 28 EQUIFAX SEES 'TURNING POINT' IN HOME EQUITY CREDIT IMPROVEMENTS percent in August—the first monthly increase since November 2007, according to Equifax. The company says its findings signal "a possible turning point in mortgage demand." Equifax highlighted this newly developed Home equity installment balances rose 0.3 trend in home equity credit in its newest National Consumer Credit Trends Report, and it bears noting after the home equity credit market plummeted along with property values during the housing downturn. The total number of home equity installment loans fell 43 percent in a span of four years— from 7.7 million in August 2007 to 4.4 million in August 2012, Equifax reports. Home equity installment balances contracted even further, declining 49 percent from their $278 billion peak in September 2007 to just $143 billion in August 2012. But according to Amy Crews Cutts, Equifax's chief economist, recent trends indicate the residential real estate market has finally found solid ground. "We're seeing signs that the contraction in mortgage debt is slowing and delinquencies continue to trend down at the same time that mortgage rates set new record lows on almost a weekly basis," Crews Cutts explained. "The environment has been set for growth for a while; now it looks like it may finally be happening." While delinquency rates on home equity primarily due to a higher spending on goods, up $46.2 billion, while spending on services rose $11.1 billion. The increased spending on goods, though, was heavily weighted to non-durable goods, $42.2 billion, compared with $4 billion for durable goods, suggesting consumers were reluctant to spend on higher ticket items that are often financed. The Personal Consump- tion Expenditure (PCE) Price Index—often considered the Federal Reserve's favored measure of inflation—rose 0.4 points in August, the sharpest increase of the year, and was up 1.5 percent in the last year. In July, the index saw a year-over-year increase of 1.3 percent. The "core" PCE Index—excluding food and energy—rose 0.1 point in August and was up 1.6 percent in the last year, unchanged from July. accounts were stable in a narrow band in recent months, Equifax says write-off rates accelerated their declines in August. Home equity installment loans were written off at a rate of just 2.69 percent during the month, down 16 percent from July's write-off rate and the lowest level Equifax has recorded since February 2008. Looking at home equity credit developments at a more granular level, New Mexico led August's growth with both the largest monthly gain in loan balances (+2.3 percent) and in the number of loans outstanding (+1.7 percent). Rounding out the top five states with the greatest percentage growth in loan balances were California (+2.3 percent), Nevada (+2.1 percent), Colorado (+2.0 percent), and Florida (+1.9 percent). The same states topped the charts for percentage growth in number of loans but in different positions. Coming in behind New Mexico and the No. 1 spot was Florida (+1.6 percent), Nevada (+1.5 percent), California (+1.35 percent), and then Colorado (+1.3 percent).

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