Analysis: Taking a Look at the Recovery
By Joanne Morrison
Sun Mar 31, 2:32 PM ET
WASHINGTON (Reuters) - The U.S. economy seems to be rolling ahead after a year-long slump, but economists say growth could decelerate in the second quarter if businesses keep their wallets snapped shut and consumers don't open theirs as freely.
During the shallow recession, consumers were the key underpinning for the economy, making a more-than-healthy number of purchases of expensive items like homes and cars.
But economists say that with the benefits of tax cuts, lower energy prices, tax rebates and lowered interest rates mostly in the past, a rise in consumer spending will hinge primarily upon wage and salary growth.
Despite the cautious words, which echo comments by most Federal Reserve (news - web sites) officials, including Fed Chairman Alan Greenspan (news - web sites), few economists see a double-dip recession as a credible threat right now.
Business spending remains a question mark for both the central bank and private economists.
Thus far, corporate profits have been relatively soft, breeding caution in executives and making businesses unlikely to increase wages or make other investments in the work force.
"We've gone through a period where almost everything that could have, did turn positive for the economy," said Mark Vitner, an economist for Wachovia Securities in Charlotte, North Carolina.
"I think the economy is going to hit an air pocket in the spring," he added, just as the Fed contemplates when it should start raising interest rates.
U.S. personal income rose 0.6 percent in February after a 0.5 percent increase the month before, the Commerce Department (news - web sites) said on Friday. However, wages and salaries, a more clear-cut indication of how much bacon Americans are bringing home, rose 0.4 percent after remaining unchanged in January.
So far this year, the Fed has held interest rates steady at four-decade lows. It signaled earlier this month that it no longer viewed weakness as the main economic threat, which most economists saw as a sign higher rates were down the pike.
Last year, the central bank lowered short-term interest rates 11 times to help prop up the economy, which was slowing even before getting hit by the Sept. 11 attacks.
Now, many economists believe the Fed is poised to begin raising rates as early as June to keep the economy from overheating and stimulating price pressures.
UPBEAT ECONOMIC DATA
A slew of data released over the past few weeks has shown that the U.S. economy has indeed steamed ahead after the contraction during the third quarter of last year. But most of the gains reflect last year's huge inventory liquidation, which forced businesses to restock shelves.
Last week, the Commerce Dept. reported that economic growth in the fourth quarter of 2001 was stronger than previously thought, with gross domestic product (GDP (news - web sites)) rising at a 1.7 percent annual pace instead of the 1.4 percent rate in the prior estimate, while after-tax corporate profits slid.
"The components that were revised up -- consumer and government spending -- were already doing well, but they aren't necessarily sustainable," said Bill Cheney, chief economist at John Hancock Financial in Boston. "The components that got weaker -- corporate profits and corporate spending -- were the ones where we most need the rebound."
Cheney predicted that inventory rebuilding will help push first-quarter growth to "as high" as 5 percent.
"The question is what happens after that. The worry is that growth drops back to 1 percent to 2 percent because profits don't recover," he said.
"I don't know that there is anything left to propel GDP growth up for the rest of the year, because car sales are already strong, home sales are already strong, and in fact home sales may get weaker," Wachovia's Vitner said.
Still, most economists said, absent any unexpected economic shocks, it was unlikely the U.S. will dip back into recession.
"I don't think there is any real risk of a double-dip (recession), normally, unless we get another shock to the economy, such as a rise in oil prices, or another terrorist attack," said David Wyss, chief economist at Standard & Poor's in New York.
Even so, consumer spending is not going to be the driving force of the economy's expansion.
"The consumer is already spending at the max," Wyss said. "The only thing is we will have to start seeing some (business) investment building."
But while business investment is down now, economists believe it will pick up during the second half of the year.
Some signs of a pickup have already emerged, with the latest manufacturing gauge showing Chicago-area manufacturing activity unexpectedly strong in March. The index from Chicago purchasing managers rose for a second straight month.
While many economists expect that consumer spending will not accelerate further in the next few months, they also don't believe it will sink.
Consumer spending logged another tidy gain in February, rising 0.6 percent after climbing 0.5 percent the month before, the Commerce Department said on Friday.
"I don't think consumer spending will collapse," said Anthony Chan, economist at Banc One Investment Advisors in Columbus, Ohio. "Consumers are likely to remain resilient. I think (spending) will moderate, but it won't fall off a cliff." |
