America's Spend-less Recovery

Data on the health of the US economy is sending investors mixed signals but investors should be more worried about the weakness of the consumer than the strength being shown by the manufacturing sector according to Kevin Logan, the chief US economist at HSBC.


“GDP (gross domestic product) growth in the first quarter came in at 1.8 percent at an annual rate, well below the already subpar 2.8 percent rate registered in 2010” said Logan in a research note.

“Meanwhile, other data painted a much more robust picture of economic activity in the first quarter. Manufacturing output increased at a 9.7 percent rate in the quarter. Private payroll employment showed its strongest quarterly increase since the end of the recession with a gain of 485,000 new jobs. The weighted average of the ISM indexes of manufacturing and non-manufacturing activity soared to its highest level since 2004,” he said.

The problem for Logan is that the all-important service sector is struggling in the face of a weak housing market and higher gas prices.

“Growth in the service sectors of the economy, which makes up about 65 percent of all economic activity, has been lagging behind,” Logan said.

“Weakness in the demand for housing and changes in discretionary spending on services are holding back the overall growth of consumption spending. The end result is slower growth in GDP in the current recovery compared with previous rebound,” said Logan.

As CNBC’s Steve Liesman reported on Tuesday, the Federal Reserve talked long and hard over whether to bring its unconventional measures to an end early at its April meeting.

Logan believes once a second round of quantitative easing comes to an end, the Federal Reserve will keep rates low to stimulate jobs and growth.

“The policymakers at the Fed believe that the recent surge in the prices of energy and food productswill only have “transitory” effects on the underlying rate of inflation” “They continue to emphasize the need to promote growth and employment and appear willing to risk a rise in inflation.

"We expect that they will stay with an accommodative policy position for the rest of this year and well into 2012,” said Logan.