I thought it would be a good idea to give readers a general overview of the current U.S. economy. Think of this as the economic equivalent of "you are here" on a map.
First, let's see what makes up U.S. GDP. Here's a pie chart that shows each part of the economy and how large it is in the "big picture."
Personal consumption expenditures are simply people buying goods and services. Government spending is, well, government spending (duh!). Nonresidential investment is the eco-geek way of saying business investment. Residential investment is housing. Net exports actually subtract growth from U.S. GDP because the US is a net importer of goods and services. However, I included them in this graph so you could see how important they are to the US economy as a whole.
Now that we have an overall picture, let's look at the various parts from the largest to the smallest.
Overall growth - all the parts from the pie chart added together -- as measured by the Bureau of Economic Analysis has been anemic for the last four quarters. Here is a chart of the seasonally adjusted annual growth rate of the U.S. economy for the last four quarters.
In general, economists believe the U.S. economy can grow somewhere between 3 percent to 3.5 percent when it is operating at "full potential." That's why the last four quarters are considered sub-par. It wasn't the consumer's fault. For the last four quarters, the growth rate of consumer spending has been consistent and solid.
However, the latest news from retail indicates the consumer may be slowing down. April retail sales dropped .2 percent. Wal-Mart reported a 2.8 percent drop which was the largest drop in 28 years. The International Council of Shopping Centers data dropped 2.3 percent -- the biggest drop it ever recorded. 80 percent of retailers missed their sales targets (thanks to the Big Picture blog for the information). I want to caution this is only one month of data. However, it's a really bad month by historical standards. If this trend continues, we'll have problems. But we have to wait and see how this plays out.
Business investment has been spotty for the last four quarters.
Housing has been a drag on growth for the last four quarters.
However, business investment may be picking up. The last few durable goods orders numbers have been positive, and the Federal Reserve's Industrial production indicators rose smartly last month. In addition, the industrial production number increased across all industry areas.
Housing is still in the doldrums. While new home sales increased 16 percent last month, that number is suspect considering all the major publicly-traded homebuilders reported big earnings decreases last quarter, failed to give future earnings guidance and called the current environment "challenging." If the Census Bureau does not lower that number, there is still the issue of prices dropping 11.1 percent. The new home sales numbers dropped the most in four years on Friday. This number was more in line with the homebuilder's recent reports. The existing home market is about 6 times larger than the new home sale market, making the existing home sales market more important.
As mentioned above, imports also drag U.S. growth down because we send money overseas for the products we buy. So long as we are a net importer -- meaning imports are larger than exports -- this part of the economy will subtract from overall growth.
So where are we? Not in a very good place. We have three smaller sections of the U.S. economy -- imports, business investment and residential housing -- either subtracting from growth or not adding that much to growth. Business investment may be picking up, but we need a few more months of data before we can firmly make that call. The largest part of GDP -- consumer spending -- has done well for the last four quarters but had a terrible April that was "statistically significant." "Statistically significant" means the drop in retail sales could be more than just a blip on the radar screen; the size of the drop as evidenced by the Wal-Mart and International Council of Shopping Centers data raises some serious concerns going forward. We'll have to keep a very close eye on these numbers going forward to see where the economy is going. Hale Stewart also writes daily economic and market commentary on his blog, the Bonddad Blog. He would like to dedicate this column to the memory of his mother, who died earlier this year.