There were a few key reports about the economy this week. Economic growth for the Spring was revised down to 1.3% as both consumer and business spending grew more slowly compared to previous periods. After contributing 2.5% to economic growth at the end of 2011, inventories have been a drag on growth in the first two quarters of 2012, which is not bad news. Companies probably found themselves with too much inventory and now are making adjustments to get back in line with consumer spending. Speaking about consumer spending, it has risen by 1.9% over the last year, contributing to the sluggishness of the recovery. Over that same period, inflation as measured by the PCE deflator (average price of consumer goods and services in GDP) rose by 1.6%.
On Friday, there was another report about the state of the consumer (updated for August 2012). Real personal income (real means adjusted for inflation) declined by 0.1% in August while real consumer spending rose by 0.1%. As a result, the savings rate declined to 3.7% (down from 4.1% in July). Consumer spending is on pace to grow by about 2% for the third quarter, slightly faster than the Spring. Meanwhile, consumer prices have risen by 1.5% since August 2011 while core consumer inflation is 1.6%.
Add it up and you still get a sluggish economy with below-average inflation. The next big economic report is this Friday's report on the job market. Currently, the consensus is for just over 100,000 jobs created with little change in the unemployment rate.