|
Article Excerpt
For nearly two years observers have been expecting the consumer engine that drives the economy to stall. So far--thanks to incredibly low interest rates and rising home values and personal incomes--consumers continue to spend. And they continue to invest in housing. How long can it last?
ONCE UPON A TIME IN AMERICA there was a consumer society with a predictable pattern of behavior.
Consumers spent money, took on more debt and then spent more. Businesses expanded until the economy overheated. As the good times rolled, lenders became a little lax and credits weakened. To curb inflation, the Federal Reserve would raise interest rates. This caused the economy to slow. Profits fell. Layoffs spread around the nation. Consumer credit deteriorated. Lenders tightened underwriting standards and pulled back credit lines. The consumer started spending less and saving more. Household debt ratios went down.
Then, after inflation came down as the economy cooled, the Federal Reserve would reverse course and lower interest rates to get things going again. Consumers--who had denied themselves for a long time and thus had pent-up demand--began to spend again. The economy began to grow again, sometimes very rapidly. The economy had come full circle.
This time, it's different--quite different. During the long boom of the 1990s and into early 2000, the economy did not overheat and inflation was kept well under control, thanks partly to big gains in productivity. There was virtually no inflation to bring down. Another twist was this time the recession came with low interest rates, followed by further rate reductions and the beginning of a recovery.
During this recession, layoffs have not been rampant--August unemployment was down to 5.7 percent from 5.9 percent in July. Personal income has continued to rise. Importantly, productivity not only rose during the recession; it soared during the early recovery. Credit quality has mostly held up.
"There's some deterioration in consumer credit, but it's not that significant," says Nancy Wentzler, chief economist with the Office of the Comptroller of the Currency (OCC), Washington, D.C., which oversees bank examinations.
The intrepid consumer, while cutting back last year, sharply stepped up spending in the first quarter, then slowed spending dramatically in the second. More recently, consumers resumed spending at a more moderate level in July even as the stock market plunged to a six-year low. Most economists expect consumers to continue spending at a moderate 2.5 percent to 3 percent annual pace in the coming months.
"It's not too bad, but not great either," says Stan Shipley, senior economist at Merrill Lynch & Co., New York. "One of the reasons [the recovery] will not be stronger is that usually in a recession you kill off the big consumer sectors, like housing and auto sales. Low interest rates kept both of those alive during the recession. So they will not take off as a result, so the recovery will be a little slower."
Even as economists scale back their forecasts for recovery in the second half of the year, the consumer remains king of the economy. "The strongest sectors of the economy are still tied to the consumer-housing, auto and retail sales," says Shipley. "The consumer is the driver of the U.S. economy," he adds, with rising spending by the federal government adding a little boost into the mix.
There is, however, a note of caution in the air and some worry that the economy could slip back into recession or grow so slowly it will feel like a recession. When the Federal Open Market Committee (FOMC) met in August, its members found the risks facing the economy to be "weighted mainly toward conditions that may generate economic weakness," but kept the Fed funds rate steady at 1.75 percent, a 40-year low
The Fed's shift in bias was made partly because a string of corporate accounting scandals shook the confidence of investors and sent the stock market plummeting. The FOMC indicated that current low rates and strong productivity gains "should be sufficient to foster an improving business climate over time." While this left open the possibility the Fed could lower interest rates at its Sept. 24 meeting or later, it by no means signaled that the Fed would, in fact, do that.
After the Fed's August decision to leave rates alone, other economic reports indicated a mixture of continuing strength and some occasional signs for worry. Retail spending in July, the Commerce Department reported, rose a brisk 1.2 percent (later revised to 1.1 percent)--mostly because automakers reintroduced zero-percent financing. Auto sales rose to 1.52 million vehicles sold, a sharp 8.2 percent rise from the 1.35 million sold the previous July. The government reported U.S. retail sales in August actually rose o.8 percent. Yet a widely watched index of consumer sentiment from the University of Michigan for September fell more than expected to 86.2 from 87.6.
It's getting harder to predict how the consumer will behave. Scratch the surface of the latest economic analyses coming from the Federal Reserve, Wall Street firms, academia and elsewhere, and you find not a little bit of bewilderment--both at the fact that consumers kept spending during the recession and at the fact that they continue to spend at a moderate to brisk pace in the early recovery.
"I don't know what's going to happen to consumption," admits Robert Shiller, professor of economics at Yale University.
The consumer's credit performance is also baffling. Notes George Yacik, vice president at SMR Research, Hackettstown, New Jersey, "Although I have been expecting to see weakness...
|
.%20%20&position=1)