Consumers Are Suddenly Feeling Better


Are American consumers going to keep on spending? It's a key question for the health of the U.S. economy. Some economists are predicting that the abrupt downturn in housing will frighten consumers into folding their wallets and closing their purses. When that happens, they say, the U.S. economy will go cold and recession will threaten.

Maybe, maybe not. In fact, there was a bit of a consumer chill in August (see BusinessWeek.com, 8/30/06, "Consumer Confidence Crashes"). But only a bit. And the evidence is that consumer spending is likely to remain healthy despite the housing slump. Consumers, it turns out, are beginning to feel quite a bit better.

On Sept. 29, the government reported that consumer spending rose a modest 0.1% in August, which amounts to a 0.1% decline after inflation. But that may have had more to do with high gasoline prices than with housing. Sticker shock at the pump seems to have caused people to drive less: Inflation-adjusted outlays for energy goods and services (mostly gasoline) were down 2.2% from a year earlier. Now, of course, that's old news. Gasoline prices have come back down.

RISE IN SPENDING. One sign that consumers aren't retrenching drastically is that the personal savings rate remained negative in August, meaning that people actually spent more than their incomes. (The savings rate was –0.5% in August, vs. –0.7% in July.) Not exactly evidence of a mass conversion to frugality.

While the income and spending numbers date back to August, more recent numbers on consumer confidence point toward healthy future spending. On Sept. 29, the University of Michigan reported that its final index of consumer sentiment, which was depressed by high gas prices, rebounded in the second half of September to its highest level in five months. Along with cheaper gasoline, consumers have been cheered by the health of the stock market, where the Dow Jones industrial average is flirting with an all-time record (see BusinessWeek.com, 9/27/06, "Decoding the Dow's Big Run").

Action Economics, an economic forecasting firm, says that income growth should sustain spending in the months ahead, despite the housing slump. It's expecting disposable income, adjusted for inflation, to rise at a 3.6% annual rate in the third quarter and a 5% rate in the fourth.

Action Economics writes, "Real spending is receiving a sizable shot in the arm from falling prices, so consumer spending in real terms is actually accelerating alongside the renewed weakness in the housing market since July."


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