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Strategies & Market Trends : VOLTAIRE'S PORCH-MODERATED -- Ignore unavailable to you. Want to Upgrade?

To: Jim Willie CB who wrote (41037)	9/7/2001 11:00:36 AM
From: stockman_scott	Respond to of 65232

AG Edwards On Why Consumers Keep Spending... ___________________________________________________ Why Consumers Keep Spending This week's large increase in the August National Association of Purchasing Managers' (NAPM) index shows that the economy is starting to strengthen. However, many people still have lingering concerns that consumer spending may decline, sending the economy into a recession. Today I thought it would be good to explain why consumer spending has held up so well during the slowdown and why a downturn in consumer spending is still not likely to occur. There are two reasons some people worry that consumer spending will decline. First, the unemployment rate is rising and second, consumer confidence has declined. It is logical to assume that a rising unemployment rate will dampen consumer spending. It is also logical to think that if consumer confidence has declined, then consumers will spend less money. However, this logical reasoning leaves out some very important factors. Consumers keep spending because they can. Consumers have more purchasing power and can afford to buy more goods this year than they did last year. The capacity to spend has increased, because consumers' wages and incomes are rising faster than inflation. For example, the average hourly wage increased by 4.2% in the 12 months ended in July. During that time consumer price inflation increased by only 2.7%. This means that the average worker's wage rose more than the cost of the goods that he or she buys, allowing him or her to spend more this year than last year. Another more comprehensive measure looks at total income from wages, rents, interest and profits. Personal income for the whole economy increased by 5.3% during the 12 months ended in July. But once again, inflation increased by only 2.7%. Therefore, consumers' incomes increased by more than prices rose, giving consumers more than enough money to cover higher prices, with some left over to buy additional goods. Consumers have a greater capacity to spend, but the rising unemployment rate must be a problem, right? Well, not exactly. The rise in unemployment is a disappointment after years of declining unemployment. But even if the unemployment rate rises to 4.6% this month, there will still be 95.4% of the labor force working. During the last 30 years, the economy has enjoyed this high level of employment and this low level of unemployment less than 11% of the time. In other words, a greater percentage of the people are working now than during most of the last 30 years, and their purchasing power is going up, not down. So why shouldn't total consumer spending go up? Looking back, the one factor that traditionally caused consumer spending to decline and the economy to fall into a recession was a decline in consumer purchasing power caused by high inflation. Whenever consumer prices rose faster than workers' wages or personal income, consumers could not afford to buy the same amount of goods, and they would have to reduce spending on some nonessential goods in order to buy basic necessities. This potential problem is always a concern to policymakers. Therefore, the Fed has been very careful to fight inflation during the last few years in order to prevent inflation from eroding purchasing power. Fortunately, policymakers have been successful in keeping prices from rising faster than wages and incomes. As a result, consumer spending has not declined like it usually does during a true recession. By keeping inflation low, the Fed has made it easier for consumers to stretch their incomes further, and the economy does not appear to have fallen into a recession. Thanks to sustained consumer spending, the economy continues to grow, just not as fast as it did a few years ago. Rising unemployment may have made consumers more cautious. However, the rising income of many people still working is more important than the reduced income and spending by the fewer people who lost their jobs. Finally, the tax rebates and the reduced tax withholding means that consumers are able to keep and spend more of their personal incomes. With after-tax income rising, consumer spending is likely to increase at a faster rate during the next few quarters than during the last few quarters. In summary, there is always a lot of doubt when the economy first starts to strengthen after a long period of weakness. Nevertheless, the economic fundamentals are improving, not getting worse. Consumer spending continues to rise because consumers' incomes and wages are rising faster than inflation. Consumers have a greater capacity to spend, and this more than offsets concerns about rising unemployment among a small percentage of the population. With inflation declining and after-tax income rising at a faster pace, the economy is likely to start to pull out of its slump this quarter. The biggest risk to the economy would be from some unexpected event that pushes inflation sharply higher, reducing consumer purchasing power. Fortunately, that has not happened. As long as consumers' wages and incomes increase by more than consumer prices go up, total consumer spending is likely to rise. agedwards.com