Consumption growth in the third quarter is poised to top the 6% rate posted in 2001's fourth quarter, when the introduction of 0% financing by the auto industry encouraged a post-September 11 spending spree. But can this strength be sustained? While our forecast still has some downside risk, we at MMS International believe consumption should grow at a respectable clip in 2003's fourth quarter.
A PERFECT STORM? Some observers have expressed concern that this robust spending could largely be due to one-off events and that a sharp slowdown can be expected in the near term. Indeed, a solid argument can be made that consumption over the summer benefited from a perfect storm of positive -- yet temporary -- developments.
The 2003 tax-stimulus package gave consumers more money to spend, and mortgage refinancings surged to a record high. Mother Nature also cooperated as the rainy spring, which dampened consumption, gave way to better weather in the summer, which supported spending. Meanwhile, car sales may have benefited from an automaker-led push in anticipation of a possible strike this fall. How consumption holds up in September and October will be crucial for determining how much of the summer strength resulted from temporary factors.
Recent market action and economic data support the view that a consumption pullback can be expected over the next couple of months, though sales figures will likely still hold at healthy levels. In the stock market, auto and retail issues moved lower as investors "sold the news" in the first week of September despite robust sales figures. But this weakness could reflect Wall Street's view that the best news was already reflected in stock prices, rather than any underlying worries about fundamentals.
ABOVE-TREND BEHEMOTH. Meanwhile, the 800-pound gorilla of U.S. retailing issued a positive signal for September. On Sept. 8, Wal-Mart (WMT
) reported that based on sales through the month's first week, it was keeping its forecast that September same-store sales would rise by 3% to 5% over the prior year. While these figures are less than the 6.9% growth -- stronger than expected -- Wal-Mart saw in August, they certainly don't represent a big sales drop. Also, the Behemoth of Bentonville indicated that July sales appear to have been above the trend.
Personal disposable income jumped 1.5% in July, thanks to the tax stimulus, with the same gain expected for August. Similar figures were reported after the 2001 tax-stimulus package took effect. But after the one-time benefit worked its way through consumers' pockets, disposable income dropped 2.9% over the next two months. It's important to bear in mind that the 2001 summer stimulus reflected sizable one-time rebates, while the drop in tax rates for 2003 reflect a sustained reduction in withholding rates with only a modest rebate program.
Overall, MMS's baseline forecast is for fourth-quarter consumption to hold up reasonably well, with a growth rate expected at roughly 3%. This would be similar to fourth-quarter 2001 and first-quarter 2002, when a consumption surge of 6% was followed by a gain of 3%.
Although we expect solid growth in consumer spending, some factors could cloud the outlook. While improvement in economic activity and sentiment are surely underpinning some of the consumption strength seen over the summer, ongoing weakness in the labor market, higher interest rates, and still-high energy prices all will make the recent gains challenging to sustain. The market will be watching the weekly sales updates from big retail chains for clues as to how sales strength -- and by extension, the U.S. consumer -- is holding up. MacDonald is a senior economist for MMS International