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Investing Specialists

Economy Is Down to the Consumer and Housing

With weak business investment and government cutbacks, the consumer and housing sectors will be the two main legs of growth in the current economy's unbalanced stool.

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Overall, equity markets were little changed this week while the bond market continued to erode. Stronger economic reports and the resulting potential earnings growth was offset by fears of the Fed tapering its bond-buying programs. Auto sales, home prices, and employment reports were all better than expected and showed at least a modest improvement in trend. However, weekly shopping center data remained in the doldrums, perhaps indicating that even things with the almighty consumer aren't entirely perfect.

However, news outside the consumer sector is not pretty. Outside of the U.S. consumer, not a lot of sectors are showing growth. Trade data this week showed an expansion in the deficit, which hurts GDP growth. Furthermore, business investment, especially in structures, as just reported by the U.S. Census Bureau, continues to erode. Falling employment in the government sector and ongoing sequestration issues make it unlikely that the government sector will be a contributor to GDP growth over the next quarter or two, either. That leaves the consumer and housing as the two main engines of economic growth. These are important sectors to be doing well, but it leaves a relatively unbalanced stool for the economic recovery to stand on.

Robert Johnson, CFA does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.