June 28, 2002
A Note of Concern for the Economic Recovery
Do you ever get the feeling that Alan Greenspan gets a peek at the economic statistics before the rest of us have our chance? The Fed's decision to leave short term interest rates unchanged, even as first quarter growth in the U.S. economy was revised upward to a blistering 6.1 percent, struck some of us as a bit risky. After all, with government spending lurching upwards, and the economy picking up speed, maintaining the discount rate at its 40-year low seemed a bit like keeping the throttle open on a race car heading for a curve.
Then we got the Bureau of Economic Analysis's report on personal income and consumption for the month of May. And the Fed's concern over the economic recovery began to make more sense.
With the retail sales report, and now the BEA's personal income data, we have two indicators of what could prove to be a disturbing new trend. That is, consumers in the U.S. economy are beginning to squeeze their dollars a bit harder.
The BEA reported that consumption expenditures were essentially flat in the month of May, after growing at an inflation-adjusted 0.1 percent for each of the preceding two months. This frugality helped push national savings rates, computed as a fraction of after-tax income, up to 3.1 percent.
The trajectory of retail sales has also become noticeably flatter of late. While the 0.9 percent decline in May was largely a correction to the 1.2 percent growth spike that occurred in the preceding month, its timing was unsettling. Growth in sales over the last three months compared to the same period last year, at 3.3 percent, is only a little higher than the rate of inflation.
A one-month pause in spending growth does not constitute a new trend, of course. But in an economy where business spending remains weak, and exports are threatened, the heavy lifting in our recovery so far has been done by consumers.
And any hint of interruption in their appetite for spending is guaranteed to make policy makers break out in a sweat.
And it is easy to see how this pause could last longer than a month. The surge of consumer spending in the post-September 11 aftermath helped make the 2001 recession a one-quarter wonder, but it also pushed consumer debt to unsustainably high levels. Savings rates were practically zero from November through January as durable goods sales shot through the roof, and discretionary purchases that might have been spread out over the course of this year were compressed into the space of those few months.
In a few short weeks, our confidence in the durability of the economic recovery has taken a few hits. Our continued growth may depend on how well the other sectors of the economy perform when consumers hand the baton off to them.
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