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February 1, 2002

Consumers Open Their Wallets

When it comes to spending money, the American consumer and the Japanese consumer seem to be cut from a different cloth. In the moribund economy of the land of the rising sun, even with interest rates cut to the bone, households there have shown little appetite for the borrowing and spending so desperately needed to stimulate growth. But just a few months of zero percent financing for new cars and trucks here in America has been enough to trigger a spending spree of unprecedented size.

That spending immediately registered in the monthly motor vehicle sales data. In October of last year, when the incentives first kicked in, vehicle sales galloped out to a unheard of 21 million unit annual pace. But more importantly, the most recent statistics on the U.S. economy's overall performance show that the spending party was strong enough to keep the entire economy afloat.

The U.S. economy registered a surprising 0.2 percent growth in the final quarter of 2001, according to the preliminary report from the Bureau of Economic Analysis. Most analysts had expected the contraction in the economy that began in the third quarter to continue, especially in the aftermath of the disruptions caused terrorist attacks in September. But the collective outpouring of money from consumers’ pocketbooks, combined with a surge in federal government spending, was enough to offset declines elsewhere in the economy to produce this happy result.

The jump in consumer spending on durable goods in the fourth quarter of last year practically leaps off the page. The whopping 38.4 percent rate of increase in spending on big ticket items in the last three months of the year was enough to push the growth in overall consumer spending to 5.3 percent. That would be healthy growth in normal times, but in the teeth of a recession it is something of a miracle.

The 9.5 percent surge in Federal Government spending at the end of last year also contributed to the bottom line for the economy. With that kind of growth in spending by consumers and by Washington -- which jointly account for 85 cents of every dollar spent -- the fact that the overall economy only managed to grow by a tiny amount might be viewed as a surprise. But that simply demonstrates how far from healthy the rest of the economy remains.

Plagued by overcapacity, dismal profits, and a decline in stock prices, business spending continued to plummet in the last quarter of 2001. Business fixed investmentdeclined at an 11.2 percent rate, and inventory stocks decelerated further, plunging at a $120 billion rate in the last three months of the year. If there is a ray of hope to be found anywhere, it might be in equipment and software spending, which at least suffered smaller losses than registered in the prior six months.

Even if the growth in spending that kept the fourth quarter U.S. economy afloat is unsustainable, which it probably is, it couldn't have come at a better time. Not only has the spurt in sales depleted inventories, which will spur production and potentially hiring, but it serves as a forceful reminder of the capacity for growth in a more confident economy that has been back on its heels in recent months.

What is more, even if consumers can't keep buying goods and services at their fourth quarter rate for much longer, neither can businesses continue to put off spending on productive plant and equipment indefinitely. This raises the optimistic, but far from impossible, hope that the spending party that has carried us into the new year will give way to a broader based turnaround in the business sector that will lead us to a sustainable recovery.

Link to this commentary: https://commentaries.cberdata.org/438/consumers-open-their-wallets

Tags: economics, finance


About the Author

Pat Barkey none@example.com

Patrick Barkey is director of the University of Montana Bureau of Business and Economic Research. He served previously as Director of the Bureau of Business Research (now the Center for Business and Economic Research) at Ball State University, overseeing and participating in a wide variety of projects in labor market research and state and regional economic policy issues. Note: The views expressed here are solely those of the author, and do not represent those of funders, associations, any entity of Ball State University, or its governing body.

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