A surprising thing has happened, however. Over the past few months, consumer spending has proved resilient, as evidenced by the better-than-expected numbers in the January retail-sales report released Feb. 13 -- a rise of 1.2%, excluding auto sales. It now appears that real consumption in the fourth quarter of 2001 could rise by a hefty 6%, with the trajectory for the 2002 first quarter suggesting a further gain of at least 2% -- if not more.
What's behind this strength? A surge in the auto sector, attributed to the zero-percent financing bonanza, has received most of the attention -- and understandably so. An 81% surge in demand for autos and auto parts helped real durable goods spending rise at a record pace in the fourth quarter, at a seasonally-adjusted annual rate of 38%. But the zero-percent financing boom tells only part of the story. Auto demand has remained surprisingly firm since the expiration of the no-interest incentives, while strength in other sectors has also been impressive.
SNAPPING BACK. Slackening inflationary pressure has also been a key in driving recent consumption trends. In the fourth quarter, energy prices, as measured by the CPI, posted the second biggest quarterly decline in history -- dropping at a hefty 32% seasonally adjusted annual rate (SAAR). And since energy makes up roughly 8% of the consumer-spending basket, such a drop would suggest that consumers could have more than 2.5% of additional spending power at their disposal to allocate towards other goods and services.
Given the disinflationary (or even deflationary) pressure in other sectors as well, real spending may have received an even larger boost due to price swings alone. Again, it is clear that recent strength can be chalked up to more that just favorable prices and zero-percent financing, as retail sales, excluding auto sales, have posted an average gain of nearly 1% over the past two months.
Much of this strength is likely just a "snap-back" following the dramatic slowdown in spending seen immediately after the attacks. But several other factors also may have come into play.
LIVE FOR THE MOMENT. Some of the upside surprise in the consumption figures may be attributable to a lag in spending those tax-rebate checks that went out over the summer. Also, the marginal tax rate was dropped again at the start of 2002, which means consumption may have gained the most benefit. The much warmer than normal winter may have provided a further boost, especially in weather-dependent industries like construction. The poor returns from the stock market and near record-low yields of money-market rates may have investors seeing little opportunity cost in consuming now vs. later.
Finally, a psychological shift may also have given a lift, with many having a new sense for the fragility of life after the September 11 attacks. This may have encouraged a carpe diem boost to spending.
While there are certainly many risks ahead for U.S. consumers, recent strength has been undeniably impressive. And given further signs of economic recovery -- and the possibility that investment-loss related tax refunds and smaller tax obligations could be an added source of cash over the near-term -- it's hard to bet against them. MacDonald is a senior economist for Standard & Poor's/MMS International