November 1, 2002
Watch What Consumers Do, Not What They Say
As we stumble in the darkness of the recession towards economic recovery, one is reminded of the old movie scene where the hero is leading his friends out of a dark cave. "Trust me," the line goes, "I know what I'm doing." In the very real economic drama being played out before our eyes, the hero is the American consumer, whose two-fisted spending is indeed bringing the economy into the daylight. The question of whether or not that vital stimulus can be maintained is largely a matter of trust.
The Bureau of Economic Analysis's report on the third quarter economy paints a picture of heavy consumer spending. Thanks to a whopping 22.6 percent rate of increase inspending on durable goods, the overall economy registered a healthy 3.1 percent rate of expansion during July through September, according to the data on Gross Domestic Product. While the data are still considered preliminary, the report clearly shows an economy that has picked up speed over what we experienced in the early summer.
The optimism in the BEA report stands in contrast to the less complete information on the current state of the economy that has been received in recent weeks. Apart from thehousing industry, which continues to float on its own cloud, the tone of recent reports has been decidedly maudlin. Vehicle sales, which contributed to the GDP growth reported by BEA, have fallen sharply, consumer confidence has dipped, and the overall industrial sector, as judged by the Federal Reserve's Index of Industrial Production, has slumped for two consecutive months.
But the gloom of those reports appears to be misplaced. And, if anything, that probably tells us as much about the quality of the data as much as anything else. For several years running, consumer confidence has failed to perform up to its old billing as a leading indicator of spending. Indeed, it might be said that it is spending itself, particularly on durable goods, that reveals consumers' true confidence in their immediate future. Thus the third quarter report tells us that consumers feel reasonably secure in their own short-term economic prospects.
The situation with the manufacturing data is more complex. Due to consolidation in the electric utility industry, much of the data on industrial electricity sales, which are heavily used as an indicator of output, have become unavailable. It is hard to know whether these omissions bias the measures of manufacturing output one way or the other. But it is easy to see that a quarter of 3.2 percent growth infinal sales with almost no change in inventories does not jive with an output index showing an actual decline.
According to the BEA, consumers weren't the only ones spending money over the last three months. In a quarter that saw the short-lived Federal budget surplus officially vanish, spending by the national government again grew by 2.9 percent. That was considerably down, however, from the breakaway growth of spending the previous nine months. Moreover, state government spending, reflecting the seriousness of their collective fiscal crises, managed only a 1.3 percent gain.
The most heartening news in the GDP report was the strengthening of the tentative recovery in spending by businesses on plant and equipment. For the second consecutive quarter, spending on equipment and software grew, accelerating during July-September to a 6.5 percent rate. Other categories of investment spending, most notably on buildings and land, weren't nearly as upbeat. Yet even if declines in the latter indicate that companies are not yet adding to capacity, the end of sharp declines in equipment spending hopefully signals that companies have moved beyond the point of mere damage control to their bottom lines.
That news couldn't be any better for countless businesses in Indiana. It's easy to forget, in this current downturn, that the last recession this country experienced was followed by the longest-lived growth streak in our modern economic history. If anything like that happens again, we may look back to the fall of 2002 as the point where it all got started.
About the Author
Educational Attainment, the 21st Century Fund and the Future of SchoolingIndiana ranks 42nd in educational attainment.
Big Savings for Ending Prevailing WageMy statistical models show that repealing state prevailing wage laws save taxpayers money.
Re-Thinking Economic Development A large share of the most mobile families—perhaps half—no longer need to live near where they work.
Money Illusion and InflationPrice fluctuation could cause inflation to last longer, but it didn’t cause the inflation, it simply extends the pain.View archives