Episode 35
Episode summary
Positive economic signals continue to surprise observers. Caleb and Liz discuss the factors that pushed second quarter GDP to exceed expectations and what that means for small businesses.
Shownotes
Gross Domestic Product, Second Quarter 2024 (Advance Estimate) [BEA]
Personal Income and Outlays, June 2024 [BEA]
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Transcript
Liz Wilke (tc: 01:00:33.19) – Hi, I’m Liz Wilke.
Caleb Newquist (tc: 01:00:34.99) – I’m Caleb Newquist.
Liz Wilke (tc: 01:00:36.85) – And this is the Gustonomics Podcast. In each episode, we bring you a little bit of economics knowledge so you can be more informed, use the information in your business or work, or you need something to break your Olympic fever.
Caleb Newquist (tc: 01:00:51.21) – Please remember to rate, review, and subscribe to the show or share it with an economics curious friend. Anything you can do to spread the word about the podcast is greatly appreciated.
Caleb Newquist (tc: 01:01:03.16) – Hello, Liz.
Liz Wilke (tc: 01:01:04.84) – Hello, Caleb.
Liz Wilke (tc: 01:01:06.16) – Are you ready for the Olympics?
Caleb Newquist (tc: 01:01:07.82) – No, I’m not.
Liz Wilke (tc: 01:01:11.45) – Do you?
Caleb Newquist (tc: 01:01:12.02) – I’m thrilled that I am not. I’m thrilled to not be in Paris for the Olympics.
Liz Wilke (tc: 01:01:17.10) – Ah, yes. I’ve I’ve I can’t ever say that I have not been thrilled to be in Paris. I think it’s a lovely city, but it does seem like it would be a little much right now.
Caleb Newquist (tc: 01:01:27.42) – Right now.
Liz Wilke (tc: 01:01:28.21) – Yeah, yeah, yeah.
Caleb Newquist (tc: 01:01:29.42) – But yeah, I mean, I I I enjoy stumbling across the events from time to time, but I’m not a I don’t find myself, especially like the first couple of days. I don’t find myself watching anything and then I’ll hear about something. I’m like, oh, should we watch Simone Biles tonight? And then, you know, we watch Simone Biles and that’s pretty great. So anyway, but yeah, I’m not like champin’ or anything. What about you?
Liz Wilke (tc: 01:01:59.07) – I I don’t have a schedule per se, but I do enjoy watching gymnastics, men’s and women’s. And I do like watching it without knowing who wins. So I’ve got to I’ve got to really put up some barriers about watching too much of the news, especially if I intend not to watch it live.
Caleb Newquist (tc: 01:02:18.05) – Yeah.
Liz Wilke (tc: 01:02:18.68) – My personal sport is rock climbing because I myself am a rock climber.
Caleb Newquist (tc: 01:02:23.35) – Wait, how do you so how do they do Olympic rock climbing? Is it is it a race?
Liz Wilke (tc: 01:02:28.41) – So it’s based on speed, actually, all at once. And unlike gymnastics, where you win a team event or an all around, but you can also place in each of the individual events. Last year. Yeah, it was they had three events. There’s speed climbing, which is a race effectively. There is bouldering, which is a set of low problems. You don’t need a rope you, but they’re sort of really complicated and you have to get through as many of them under control as you can in the time that you have allotted to you.
Liz Wilke (tc: 01:02:57.54) – And then there is sport leading, which is a very, very large wall with a climb on it that gets progressively harder. And you get points for how far you make it up the wall in the time that you have to do it.
Caleb Newquist (tc: 01:03:09.77) – Oh, wow. OK, I’m curious. This makes me think I was I went down a bit of a El Capitan rabbit hole recently about the climbers from the 60s and 70s who are like basically, I don’t know, outlaws kind of is a pretty fascinating thing. I don’t know if that’s in your sphere of interest, but and I don’t know enough about it to remember anybody’s names, but the stories were pretty incredible.
Liz Wilke (tc: 01:03:37.64) – There’s there is a lot of lore about Yosemite and the sort of climbers, the pioneer climbers of that age. There’s there is a lot. Did you watch the documentary Valley Rising? That’s sort of where a lot of people come into contact with that lore.
Caleb Newquist (tc: 01:03:55.01) – I don’t know if that’s the one I saw or not.
Liz Wilke (tc: 01:03:56.86) – Or Valley Uprising. My bad.
Caleb Newquist (tc: 01:03:59.02) – OK. Yeah. And the rivalries are kind of intense. That’s what kind of made it fun,
Liz Wilke (tc: 01:04:04.04) – Interesting and so unexpected that a sport predicated entirely on the ability to climb higher, faster and stronger has any sort of ego in it whatsoever. I mean, you don’t you don’t think you’re going to see it. And then it just pops up in the most unexpected places.
Caleb Newquist (tc: 01:04:22.68) – Oh, you can’t say that Liz Wilke doesn’t bring the goods to this podcast every time, folks. OK, so back to business.
Liz Wilke (tc: 01:04:35.07) – You said we’re going to back to economics, back to economics.
Caleb Newquist (tc: 01:04:38.91) – Liz, did anything interesting happen this week? We’re recording this on a Friday.
Caleb Newquist (tc: 01:04:43.58) – And I’m curious if anything, any interesting economic data, any interesting economic data.
Caleb Newquist (tc: 01:04:50.11) – Hit the airwaves in the last I don’t know day or so.
Liz Wilke (tc: 01:04:53.61) – Well, Caleb, it’s funny that you ask. In fact, we did get an interesting piece of economic news: the GDP number for q2.. Oh yeah, and it was far and away above expectations. We clocked in at 2% annualized growth over the course of the year and that is 8 basis points right, so 0.8 percent above the consensus model that everybody thought we would. We would fall in around 2% right, annualized, which is actually consistent with the us long-run growth average.
Liz Wilke (tc: 01:05:25.20) – So everybody thought 2% would be just fine, yeah, and like back to normal, right, especially as inflation is cooling. But nope, consumer spending and investment- it really spurred a big jump this quarter. I think, largely unexpected by people.
Caleb Newquist (tc: 01:05:43.33) – Okay, so I mean, you answered my first question, which is what drove the GDP growth, and you mentioned consumer spending and investment. I am going to lead with the investment question. What kind of investment is like? When you say investment, what do you mean by that? What was happening there in that piece of it?
Liz Wilke (tc: 01:06:04.06) – Yeah, so I’m actually glad we’re starting with investment. We talked a lot about consumer spending. They’re such a huge part of the economy, but they didn’t. They they contributed to, but didn’t really drive this surprise increase. So investment, for those of you that have been listening to our definitions on this- is basically: you know the stuff that you buy that brings you money in the future but you don’t consume now. So, like inventory buildup is investment right. So we saw some investment in wholesale and retail trade, right.
Liz Wilke (tc: 01:06:33.70) – And we saw some investment especially in like equipment and IT equipment and intellectual property right, investments right. So like R&D and that kind of stuff, and so that stuff is all produced by the economy in this quarter, even though companies make money off of it in future quarters, right, when they ultimately sell it or what have you. And so that’s why it counts in this quarter . It’s a nice good sign actually, especially investment in, you know, IT and equipment, because you know those are long-lived items that you can use to be more productive, not just next quarter but, you know, for the next four or eight or twelve quarters. So it’s a good. It’s a good sign, honestly, of a little optimism about you know just sort of making changes for like longer-term growth .
Caleb Newquist (tc: 01:07:20.05) – And you, you kind of answered my question which was going to be: do economists do? Do they like that investment factor. Is that, like, does that tell them more than just you know, strong consumer spending? And it sounds like it does.
Liz Wilke (tc: 01:07:42.34) – Yeah, it tells us more about the future, right, so, like a, like a person, right, I can buy something there for use today, or I can invest in something for the future. Right, if I have, you know I can, I can buy a car today or I can invest in education that will make me money in the future. Right, and actually a car is a tough example because people do use it to make money in the future.
Caleb Newquist (tc: 01:08:05.23) – Yep, but you could, you could compare, you could compare education versus a bag of avocados which might get, which might go bad before you get them home.
Liz Wilke (tc: 01:08:16.87) – Yeah, I don’t know what education today is like, cost equivalent to a bag of avocados, but, yeah, we could use that analogy for now. But I can. I can basically buy and consume something today, or I can buy something that will pay off for me in the future, right, and I’m basically putting off today’s consumption for tomorrow’s benefit, right, and so you know, if I invest in education today, you know, at that personal level, then that means my productivity and my consumption goes up in the future. So economists sort of look at it in a similar way.
Liz Wilke (tc: 01:08:50.27) – At the economy level, right. So if everybody in the economy is investing in equipment and IT products and processes for the future, right then that tells us that some point in the future we’re gonna see productivity benefits out of that, presumably right or higher production in the future, because you make investments now to get payoffs tomorrow, yep, okay.
Caleb Newquist (tc: 01:09:11.53) – So shifting gears to the consumer spending bit we’ve talked about. We did a whole episode about consumer sentiment and kind of your skepticism around that. As a metric, you are a much bigger fan of consumer spending, as I recall. So
Caleb Newquist (tc: 01:09:32.51) – Was that right? Was I right about that?
Liz Wilke (tc: 01:09:34.42) – Yeah. I’m definitely a skeptic of consumer sentiment, especially now, because consumers seem largely to be negative, but their spending seems also largely to be healthy. Yep.
Caleb Newquist (tc: 01:09:45.16) – Yeah.
Caleb Newquist (tc: 01:09:45.38) – In fact, I asked my wife today, in a way, to prepare for this podcast, where I said, how do you think things are going right now? And she’s like, not great. And I asked her a few questions about that. And the context is that we were driving away from a nice breakfast out with our daughter, as she was talking about how things were not great. And the further context is, her general feeling is that prices are just high. Everything just seems expensive, especially when you go out to eat at a restaurant.
Caleb Newquist (tc: 01:10:18.61) – Everything seems more expensive in restaurants lately, and at the grocery store. So those are the things that came to mind for her. OK. So.
Liz Wilke (tc: 01:10:25.72) – No doubt. No doubt.
Caleb Newquist (tc: 01:10:26.69) – Yeah.
Liz Wilke (tc: 01:10:28.33) – And we had a great presentation last week, right, about the disconnects between how people are feeling, and how they assess the economy, and how their actual finances, or how their actual business plans are going. And there’s just this big and growing disconnect. And it probably is driven a lot by prices, as well as some things that I could conjecture about, but won’t spend the podcast now doing, because we’ve already done an episode about the difference between vibes versus data.
Caleb Newquist (tc: 01:10:54.32) – Right. Consumer spending was also a factor in the growth, in the GDP growth. Anything notable within that, within consumer spending that jumped out at you?
Liz Wilke (tc: 01:11:08.37) – I wouldn’t say anything that jumped out at me, actually. They’re sort of like the usual culprits, right? Health care and social services, right? And that includes lots of things. That includes people getting what you think of as traditional health care, but also includes people going to physical therapy, that’s maybe really beneficial, but not strictly necessary.
Caleb Newquist (tc: 01:11:28.34) – Buying cigarettes at CVS?
Liz Wilke (tc: 01:11:29.34) – It includes people going to the dentist.
Liz Wilke (tc: 01:11:30.70) – No, it doesn’t include people buying cigarettes at CVS. That’s not included in health care.
Caleb Newquist (tc: 01:11:35.49) – I think they stopped selling them. I’m sorry, CVS. I’m sorry. Okay? You still can get them at Walgreens, though. What about services?
Liz Wilke (tc: 01:11:44.23) – But so housing and utilities also got some good spending, right? People are trading up their rentals or thinking about tiptoeing back into the market. I know in DC, there’s been a lot of inventory recently, and so people, I think, are starting to feel a little bit more like, okay, maybe the Fed’s going to drop an interest rate and I can get a better mortgage rate in September, October, November, so we can just buy now during the summer season. So I think that’s driving some consumer spending as well. And then honestly, sports and recreation.
Liz Wilke (tc: 01:12:16.87) – It’s still the summer. People are feeling pretty good. Their incomes are pretty good, and they’re spending on lots of recreation activities, including summer camps for their kids. And those are some of the big categories in consumer spending. But again, they were a strong component, but they didn’t really drive the big jump in GDP this quarter.
Caleb Newquist (tc: 01:12:37.66) – Okay. So strong consumer spending, really strong investment. Does this mean that the Fed is going to cut rates in September?
Liz Wilke (tc: 01:12:52.86) – To be honest, I don’t think at this point, it means anything about whether or not the Fed is going to cut rates in September, because the Fed has a dual mandate, full employment and low prices, low inflation, stable prices. We are not talking about the inflation rate. We’re talking about GDP growth, and we’re not even talking about the labor market, although it is definitely tied to overall economic health.
Liz Wilke (tc: 01:13:18.68) – But basically, the things that are going to affect the Fed’s interest rate decision in September are, is the personal consumption expenditures index continuing to go down? And it would be unusual, but not impossible for inflation to keep going down, even as the economy is doing well. In fact, we got a very good inflation number in our last report. So who knows, right? But it seems like right now, we had both a strong economy and a strong inflation report in Q2. So they could keep going together. And also, we have an unemployment rate at 4.1%.
Liz Wilke (tc: 01:14:01.00) – And so as long as we’re hovering at or around a 4% unemployment rate, that’s a pretty strong labor market that’s close to full employment as the Fed sees it. And so as long as those two numbers keep stable, as long as those two numbers keep stable.
Liz Wilke (tc: 01:14:14.74) – it kind of doesn’t matter what the GDP number is, except it actually raises the risk a little bit because the Fed might think, oh, well, the economy is doing so well. Inflation is coming down. We should just maybe keep it as it is until December, just because, just to make sure that we’re not just like unleashing, letting the horse out of the barn, right? So now that I’ve talked about it out loud, I said, I don’t think it matters. And then I said, I think it matters in this way.
Caleb Newquist (tc: 01:14:43.80) – If you’re allowed to contradict yourself, it’s fine.
Liz Wilke (tc: 01:14:46.30) – Yeah.
Caleb Newquist (tc: 01:14:47.05) – Okay, so here we are. Why do small businesses care about the GDP number and consumer spending? Why is that? Why, what’s the answer to the question that we always ask at the end of the show, Liz? That’s what I’m asking.
Liz Wilke (tc: 01:15:05.18) – I mean, I think maybe the first thing is to tie it back to the question you just asked me, right? So anybody who’s looking at this number and thinking, wow, that’s way above expectations. There’s no way we’re getting a rate cut, right? I don’t think it means that. So if you’re sort of looking towards that rate cut and thinking, when do I get to finance a business investment or when do I get to upgrade my equipment?
Liz Wilke (tc: 01:15:29.68) – The possibility still remains of a cut in September, as long as the inflation and the unemployment numbers continue to look pretty good, because the GDP numbers are sort of a side number to the two main numbers that we care about.
Caleb Newquist (tc: 01:15:44.56) – Well, let me ask you this. Because the investment component was so strong, does that suggest that some businesses aren’t waiting for interest rates to change? They’re just going ahead and pulling the trigger on stuff now because they feel, because they probably are optimistic about the future. They’re like, yeah, we could maybe get a lower rate in four months, but you know what? We need, this project needs this thing now, and so we’re pulling the trigger now.
Liz Wilke (tc: 01:16:09.75) – Yeah, I mean, I think that’s really possible. And I talked about that a little bit in prior, I’ve talked a little bit about that in other forums. And I think, one, small businesses in particular are still facing a pretty significant talent shortage. They still have lots of open jobs, especially the zero to nine segment and even the 10 to 49 segment, they’ve dropped a bunch of jobs, but they still have a bunch open. And they’ve been really, I think, behind the eight ball in terms of talent competitiveness.
Liz Wilke (tc: 01:16:38.59) – And so at some point, right, they’ve been sort of in a holding pattern, if they’ve been putting off investments, they’ve been in a holding pattern since mid to late 2022 in terms of financing investments. And their talent problem is not a short-term talent problem, it’s a long-term talent problem, right? And so at some point, a lot of them, I think, are thinking, let’s go now, right? I can refinance this, right? Because lots of business loans roll over, right?
Liz Wilke (tc: 01:17:07.92) – And so you might get something now that you can technically afford, you think I’ll roll it over in four to six months at a more preferable rate, hopefully when the interest rate drops, and then I’ll still have made this investment. So I do think that a lot of businesses are sort of taking advantage of the changing tech that’s available to them, but then also thinking I need to solve my talent and my equipment and my process problems for the long run and I can’t continue to wait anymore, right?
Liz Wilke (tc: 01:17:32.68) – Because as I do, I’m sort of becoming less competitive, right, by using these old processes and these old equipment and this old IT. And I would then also note that when companies buy a lot of equipment and IT, they usually need people to install it and to restructure, right, the processes around it. And so, you know, investment now also often is associated with employment strength in the coming quarters, right, as they hire people to do that.
Liz Wilke (tc: 01:17:59.71) – So I think this also means that we’ll, that’ll support the employment numbers probably in the next couple of prints.
Caleb Newquist (tc: 01:18:09.41) – That’s it for this episode. We hope you learned something new and useful for yourself or your business. Please let us know what you think of the podcast by leaving a review or sharing it with a friend or colleague who might enjoy it. I’m Caleb Newquist.
Liz Wilke (tc: 01:18:20.82) – I’m Liz Wilke. Thanks for listening.