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CONSUMERS ARE SHOWING MORE SPRING IN THEIR STEP
The summer sun isn't the only thing warming up the U.S. landscape. Consumers are glowing a bit brighter about their economic lot. And new orders are stoking the fires under manufacturing. The economy isn't in a heat wave, but cheerier shoppers and busier factories are helping to raise the temperature of this languid recovery.
To be sure, ballooning federal deficits and uncertain job prospects still send a chill through the air. But the recovery seems to be moving fast enough to shake these concerns. In particular, the downtrend in jobless claims suggests that employment worries may be ebbing.
The latest data from the manufacturing sector make the point that the economy is in an upturn but that it still faces some tough going. New orders placed with durable-goods makers increased 1.4% in April, to $125.4 billion. That was the fourth gain in a row for the usually volatile data. Orders have just about recovered from their sharp decline in late 1991 (chart), and the rising trend reflects the better outlook for domestic demand of big-ticket items.
However, the level of durable-goods shipments is surpassing the increase in new orders. That means the backlog of unfilled orders continues to decline. Unfilled orders dropped by 0.2% in April and now stand at their lowest level in 2 1/2 years. Manufacturers will have to see their backlogs grow fatter before they feel confident enough to increase output and add workers. The upward trend in new orders suggests that the backlog could turn around soon.
Factory orders may get a boost from a more bullish consumer sector. The recent increase in optimism suggests that consumers will continue to spend at a moderate pace this summer. The Conference Board's index of consumer confidence staged a big advance in May: The index rose to 71.6 from 65.1 in April. Since February, it has rebounded by more than 24 points. And the improvement is echoed by a gain in early May in the University of Michigan's consumer-sentiment index.
To be sure, the Conference Board index followed a similar pattern in 1991--but with a big difference. Last year's rally was more wishful thinking about the future, fueled by the end of the gulf war. Even as the overall confidence index rose last spring, consumers felt increasingly shaky about the current state of the economy.
This time, says the Board, consumers are upbeat about both the present economic situation and expectations over the next six months. The strong rebounds in both readings have pushed the overall index to its highest level since last September (chart). The Board notes that such a strong upturn in the index "appears to leave little doubt that the economy is at long last recovering."
But even if consumers are strolling on the sunny side of the street, they haven't left their worries on the doorstep. Employment remains a big concern for many households. The Board reports that 40.3% of the 5,000 consumers surveyed described jobs as hard to get in May. That's down from April's 45.2% reading, but it's still a high percentage. Only 5.9% think jobs are plentiful--down from 9.8% a year ago.
Consumers are also troubled about future income prospects. Fewer and fewer households expect their earnings to increase over the next six months. In May, just 16.9% felt that their incomes would by higher by November. That's one of the lowest readings on income expectations since the 1981-82 recession. The lack of large pay raises is why consumer spending won't stage a torrid comeback as in past recoveries.
Lagging income growth may also explain why the Board's survey of household buying plans was mixed in May. Plans to purchase major appliances were down in all categories, but intentions to buy a car were up.
Those intentions may already have become reality, as purchases of new domestic-made cars showed a lot more pep in mid-May. New autos sold at a 6.7 million annual rate--much higher than the 5.7 million pace of early May and April's 6 million pace.
The upturn's quicker pulse hasn't gone unnoticed by the Federal Reserve or by the bond market. For now, the central bank has indicated that, barring any surprises, it will hold monetary policy steady. That means the federal funds rate--the cost of interbank borrowings--will remain at the target rate of 3.75%.
The bond market, ever wary about a radiating economy, remains a threat. Increasing consumer confidence, car sales, and durable goods, plus worries about rising oil prices, caused the yield on a 30-year Treasury bond to increase from 7.77% on May 19 to 7.91% on May 27.
Higher interest rates will slow the recovery's progress, especially in the important housing sector. Sales of existing homes were virtually flat in April, at a 3.5 million rate, down from 3.51 million in March.
The softness probably reflected the surge in mortgage rates in April. By late May, though, mortgage rates had fallen back to their low levels of late January, clearing the way for housing's second wind. If housing shows signs of slipping further, however, the Fed is likely to cut interest rates to stop an outright retrenchment.
The central bank might also move toward lower rates if the May employment report--due out on June 5--proves especially disappointing. The latest data on jobless claims, however, suggest that the labor markets are on the mend--and that consumer concerns over jobs may be misplaced.
New filings for state unemployment benefits slipped by 20,000, to 406,000, for the week ended May 9. Filings related to the Los Angeles riots accounted for 3,900 of the claims, said the Labor Dept., and more riot-related filings are likely to show up in subsequent weeks.
Even so, new claims have been trending lower since the end of March. On a four-week moving average, which smooths out weekly volatility, claims are back to their lowest level since October (chart). Fewer claims suggest that corporate layoffs, so widespread in 1991, have about run their course. That means consumer spirits should continue to brighten into the summer.
Healthier job markets would also give the Fed more room to maneuver. That's important, because the central bank is the only Washington mechanism that can sustain the recovery. Massive deficits have all but scratched prospects for fiscal stimulus from the Bush Administration or Congress.
In fact, the lengthy recession has boxed in Washington more than ever. Sinking corporate profits and job losses have slowed tax receipts, while the thrift bail-out and demand for social services are raising outlays.
The government was $14.6 billion in the black in April, when personal income tax payments always swell Washington's coffers. But the surplus was the smallest April balance in four years (chart). And the meager overflow indicates that the federal budget is on track to post a deficit of more than $350 billion for fiscal 1992--probably $100 billion more than last year's record $268 billion.
The recession clobbered taxes. In the first seven months of this fiscal year, total government receipts are up just 1.5% from a year ago. Personal income tax payments are flat, and corporate taxes are down some 8%. More jobs and better-looking profits should reverse these trends--but probably not until fiscal 1993 begins in October.
Meanwhile, federal outlays are up 9.7% from a year ago. Payments for government-assistance programs--from medicare to Social Security--have risen sharply from last year.
The deficit problem is why this recovery will have to muster along without any fiscal fuel. However, if upbeat consumers grow increasingly willing to spend and if new orders add life to manufacturing, then the private sectors should generate enough heat to enable the economy to work up a sweat even without any action from Washington policymakers.KATHLEEN MADIGAN