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U.S.: THE JINGLE OF CASH REGISTERS RINGS IN THE NEW YEARFree-spending shoppers will keep the economy buoyant into early 1999To the surprise of many analysts, the economy is ending 1998 much the same way as it began. Consumers are still on a spending spree, to the holiday joy of retailers. Manufacturers are still struggling with weak exports, but overall job markets remain strong. And despite economic growth of about 3.5% for the third straight year, inflation is still a no-show. All in all, the story of the 1998 economy has been one of resilience in the face of many potential pitfalls, at home and abroad. While economists generally believe that the economy will need all the stamina it can muster in 1999, as domestic demand slows (page 82), the outlook in the months immediately ahead still looks fairly upbeat. Barring any foreign or domestic shocks to U.S. markets, the 1999 slowdown should develop gradually. That's because the latest data show that consumer spending has plenty of momentum (chart). They also show that housing is strong and that job growth and low inflation are stoking households' buying power. Digging into the data on personal income reveals what's happening. Overall household income has grown a solid 3% in 1998, even after taking out taxes and correcting for inflation. But the wages-and-salaries component of that income--about three-fifths of the total--is soaring at twice that pace: What's more, the current 6% growth rate of real ''paycheck'' income is double what it was three years ago. Historically, such rapid wage-and-salary growth has occurred only in the early stages of a recovery. These recent robust wage advances have been camouflaged by slow growth--only 1.9% a year--in the other two-fifths of the income pie: Lower rates have limited interest income. Strong job markets have held back unemployment benefits. And tighter welfare standards have cut the growth in transfer payments. GIVEN THE EXCEPTIONAL BUYING POWER of workers' paychecks, it shouldn't be surprising that spending has remained so strong. Retail sales in November rose a solid 0.6%, and revised data for October show that buying increased 1.2%, a bigger rise than first reported. The numbers suggest that real consumer spending on goods and services for the entire fourth quarter will grow at an annual rate of around 5%. If so, overall growth in gross domestic product could end up quite strong. Because of the energetic pace of retail spending, shopkeepers' inventories as Christmas approaches may well be skimpier than they would like. While the overall ratio of inventories to sales for all businesses--including manufacturers, wholesalers, and retailers--has been edging up during the past two years, the ratio for nonauto retailers alone continued to fall in October, hitting its lowest level in 17 years. That trend reveals why shoppers have had such a difficult time tracking down a Furby. It also means that stores' after-Christmas markdowns may be less generous than they have been in recent years. Home-related goods continue to represent a big chunk of retail sales, and that demand is coming from a buoyant housing market. In December, the National Association of Home Builders' index, a composite of builders' assessments of sales and buyer traffic through model homes, remained at its record November level of 78% (chart). Builders were optimistic about both current sales and demand during the coming six months. Indeed, despite an overall drop in housing starts in November, reflecting a large decline in the volatile apartment building category, builders broke ground on single-family homes at the fastest pace in nearly 15 years. Total starts fell 2.7% to an annual rate of 1.65 million, but single-family homes increased 5%, to 1.35 million. Mild November weather may have boosted building activity. ANOTHER REASON WHY CONSUMERS may be spending more at the mall: They're spending less at the gas station and the grocery store--especially for key budget items. Low overall inflation is boosting buying power, and that trend should continue at least into early 1999. Consumer prices for all goods and services in November rose by 0.2%, the same as the increase reported for October. Energy prices fell 1.6% and now stand 9.2% less than their levels a year ago. And prices of meat and vegetables were also down in November. For the year, total consumer inflation is on track to rise 1.5%, slower than its 1.7% pace in 1997, and the stodgiest pace for any year since the oil-price collapse in 1986. Exclude food and energy, however, and core inflation is showing a bit more of a pulse. Core prices were up 0.2% last month as well, but they will likely rise 2.4% this year, slightly more than their 2.2% climb in 1997. And producer prices for core finished goods are also rising a bit quicker. After no gain in 1997, they were up 1.3% in the 12 months ended in November. AT THE START OF 1999, the price data will probably be skewed by the already-announced price hikes for tobacco products. But in general, inflation should remain tame for a while longer. A shift toward larger price markups will likely become noticeable when the dollar's recent slide halts the decline in import prices. That's because the competition from cheaper imported goods has prevented many U.S. manufacturers from raising their own prices. Relief from import price competition will come slowly, but the trade-weighted dollar's 10% decline since August already appears to have halted the fall in prices for foreign goods. After declining for 12 months in a row, nonoil import prices increased 0.1% in both October and November, although they are still down 3.5% from a year ago. Meanwhile, manufacturers continue to suffer as the year draws to a close. Industrial production fell 0.3% in November, mainly reflecting a sharp drop in utility production due to the mild weather. Manufacturing output was flat in the month, and factory output has barely grown since August (chart). Moreover, factories in November were using only 79.8% of their production capacity, down from 80.2% in October. Except for the period this summer during the strike at General Motors Corp., that's the lowest rate in five years. With capacity having grown 5.6% during the past year, far faster than output, businesses have little reason to increase their capital spending in 1999. That's why, barring any confidence-rattling event either at home or abroad, consumer spending is the best hope for continued, if slower, growth in the economy in 1999. That's because capital spending, housing, and foreign trade will not be providing much support. And heading into the new year, households show all the signs that they are up to the challenge.
BY JAMES C. COOPER & KATHLEEN MADIGAN RELATED ITEMS
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Updated Dec. 17, 1998 by bwwebmaster
Copyright 1998, Bloomberg L.P.
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