LOL!! End of the mini-boom?
Keeping up the economic pace
msnbc.com
Rising debt could crimp consumer spending next year
By Martin Wolk
MSNBC
Sept. 12 — The economic rebound that some forecasters have been predicting for more than two years finally seems to be materializing, raising hopes for another strong quarter of earnings and buoying the stock market. But a report from the Federal Reserve this week raises fresh questions about how long the latest boom in consumer spending can be sustained without job growth — and job growth, so far, is nowhere to be found.
THE FED’S POLICY-MAKING Open Market Committee meets Tuesday, and while the central bankers are not expected to cut short-term interest rates from their current low levels, they probably will curb their enthusiasm about the third-quarter growth spurt. After all, it was almost inevitable that the economy would respond to the combination of record-low interest rates, a massive federal tax cut and a weaker dollar.
Few analysts expect the economy to sustain the current quarter’s pace of growth, estimated at 5 percent or more by some analysts, which could make it the best result since late 1999. The question is whether the economy continues to grow at or above its long-term “trend” rate of about 3.5 percent, the level needed to create a so-called virtuous cycle of rising employment and growing demand without triggering inflation.
There are several reasons to question whether the economy can meet that target in 2004, including the problem of rising household debt, as reported in the Fed’s own quarterly flow-of-funds report this week.
Households have been accumulating debt at a growing rate in recent quarters, largely because they have been tapping their home equity in wave after wave of mortgage refinancing. The Fed report shows that household debt surged at an 11.5 percent rate in the second quarter, up from 9.9 percent in the first quarter and 10 percent in 2002.
That growing debt, which has helped fuel surprisingly strong sales of cars and other durable goods this year, has not posed a significant problem for consumers because steadily declining interest rates have allowed them to keep monthly payments under control — or even reduce them in many cases through “serial” mortgage refinancing.
But now that long-term interest rates have risen substantially from the 45-year lows hit in mid-June, it seems unlikely that consumers can continue expanding their debt at recent rates. If they do, monthly debt service quickly will rise beyond the current level of 13.9 percent of disposable income, already near the top of the historical range, said Goldman Sachs economist Jan Hatzius. The only other choice would be for consumers to scale back the pace of borrowing, he notes in a report titled “Household Debt: Between a Rock and a Hard Place.”
BY THE NUMBERS
Key economic indicators
Click an indicator name to learn more
Period Latest Prev.
• Consumer Confidence July 76.6 83.5
• Retail sales July* 1.4% 0.9%
• GDP Q2* 2.4% 1.4%
• ISM Index July 51.8 49.8
• Factory Orders June* 1.7% 0.3%
• Unemployment Rate July 6.2% 6.4%
• Employment situation July* -44,000 -72,000
• Consumer inflation June 1.5% 1.6%
• Housing starts June* 1,803,000 1,738,000
• Home sales June* 6,990,000 6,958,000
CONSUMER CONFIDENCE
Recent figures
July 76.6
June 83.5
May 83.6
April 81.0
March 61.4
Feb 64.8
Jan 03 78.8
Dec 80.7
Nov 84.9
Oct 79.6
Sept 93.7
Aug 94.5
What is it?
Consumer confidence is considered important because consumer spending accounts for more than two-thirds of U.S. economic activity. The monthly Conference Board survey is one of the two most closely watched indicators of sentiment. Based on a mail-in survey sent to about 5,000 households. Results are converted to an index and expressed in comparison to the 1985 average of 100.
Source: The Conference Board
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RETAIL SALES
Recent figures
July* 1.4%
June 0.9%
May 0.0%
April -0.3%
March 2.3%
Feb -1.4%
Jan 03 0.4%
Dec 1.4%
Nov 0.8%
Oct 0.1%
Sep -1.7%
Aug 0.6%
What is it?
A broad measure of consumer spending trends. Includes sales of motor vehicles, clothing, food at both grocery stores and restaurants, electronics, building materials drugs and other items. Expressed as a percent change from previous month, adjusted for seasonal variations but not price changes.
Source: Census Bureau
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GDP
Recent figures
Q2* 2.4%
Q1 2003 1.4%
Q4 1.4%
Q3 4.0%
Q2 1.3%
Q1 2002 5.0%
Q4 2.7%
Q3 -0.3%
Q2 -1.6%
Q1 2001 -0.6%
Q4 1.1%
Q3 0.6%
What is it?
The gross domestic product is the broadest measure of the economy, comprising the value of all goods and services produced in the United States. It is reported quarterly with frequent revisions. Generally expressed as a percentage change from the previous quarter in “real” or inflation-adjusted terms. Economists presume real GDP is capable of growing at an annual rate of about 3.5 percent over the long term. When GDP declines over a sustained period of time the economy is considered to be in recession.
Source: Bureau of Economic Analysis.
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ISM INDEX
Recent figures
July 51.8
June 49.8
May 49.4
April 45.4
March 46.2
Feb 50.5
Jan 03 53.9
Dec 55.2
Nov 50.5
Oct 49.7
Sep 50.7
Aug 50.3
What is it?
The first major indicator reported each month, considered a reliable assessment of how the manufacturing sector is performing. Based on a survey of executives done by the Institute for Supply Management, formerly known as the National Association of Purchasing Management. Responses are compiled and reported as an index number. A reading above 50 percent indicates the manufacturing sector is expanding, while a reading below 50 indicates it is shrinking.
Source: Institute for Supply Management
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FACTORY ORDERS
Recent figures
June* 1.7%
May* 0.3%
April -3.0%
March 2.1%
Feb -1.0%
Jan 03 1.7%
Dec 0.3%
Nov -0.8%
Oct 1.4%
Sep -2.4%
Aug -0.4%
July 4.4%
What is it?
Data on new orders for manufactured goods, adjusted for seasonal variation, offer a good indicator of the manufacturing sector's health, closely watched because it is the most volatile part of the economy. Expressed as percent change from previous month.
Source: Census Bureau.
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UNEMPLOYMENT RATE
Recent figures
July 6.2%
June 6.4%
May 6.1%
April 6.0%
March 5.8%
Feb 5.8%
Jan 03 5.7%
Dec 6.0%
Nov 5.9%
Oct 5.8%
Sep 5.7%
Aug 5.8%
What is it?
One of the best known and most politically powerful economic indicators, the rate is calculated from a monthly survey among a sample of about 60,000 households. The rate is adjusted for seasonal variations, but unlike most economic statistics it is never revised.
Source: Bureau of Labor Statistics.
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EMPLOYMENT SITUATION
Recent figures
July* -44,000
June -72,000
May -76,000
April -22,000
March -151,000
Feb -121,000
Jan 03 158,000
Dec -211,000
Nov 1,000
Oct 119,000
Sep 65,000
Aug 20,000
What is it?
Represents the month-to-month change in jobs on payrolls of the nation’s business, government and non-profit establishments. Generally considered a more accurate indicator of labor market health than the unemployment rate. Analysts estimate the economy should add about 150,000 jobs monthly to keep up with the nation’s growing work force. Based on a sample of 300,000 establishments employing nearly a third of the nation’s workers, the figure is adjusted for seasonal variations and frequently revised.
Source: Bureau of Labor Statistics.
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CONSUMER INFLATION
Recent figures
June 1.5%
May 1.6%
April 1.5%
March 1.7%
Feb 1.7%
Jan 03 1.9%
Dec 1.9%
Nov 2.0%
Oct 2.2%
Sep 2.2%
Aug 2.4%
July 2.2%
What is it?
The most widely known and used measure of inflation, the Consumer Price Index is based on the price of a “basket” of goods including food, beverages, fuel, medical care and clothing. Value refers to year-over-year change in "core" prices, excluding volatile food and energy categories.
Source: Bureau of Labor Statistics.
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HOUSING STARTS
(seasonally adjusted annual rate)
Recent figures
June* 1,803,000
May 1,738,000
April 1,632,000
March 1,742,000
Feb 1,640,000
Jan 03 1,828,000
Dec 1,815,000
Nov 1,760,000
Oct 1,653,000
Sep 1,810,000
Aug 1,630,000
July 1,666,000
What is it?
A good indicator to assess demand for housing and construction industry health. Represents the number of new residential buildings, including single-family and multifamily homes, where construction was started. Expressed as a seasonally adjusted annual rate. Construction was started on 1.7 million new residential structures in 2002, the highest level since 1986.
Source: Census Bureau.
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HOME SALES
(seasonally adjusted annual rate)
Recent figures
June* 6,990,000
May 6,958,000
April 6,878,000
March 6,548,000
Feb 6,795,000
Jan 03 7,029,000
Dec 6,973,000
Nov 6,662,000
Oct 6,771,000
Sep 6,496,000
Aug 6,407,000
July 6,358,000
What is it?
One of the bright spots of the economy in recent years, driven at least in part by historically low mortgage rates. Figure represents the sum of new and existing single-family home sales, expressed as a seasonally adjusted annual rate. In 2002, a record 6.5 million homes were sold.
Sources: National Association of Realtors, Census Bureau
* preliminary figures
Printable version
“In the long term, this is the preferable response. But the short-term impact on household spending power would probably be even greater,” Hatzius said. “The conclusion is that, when combined with the apparent end to the bond bull market, the current debt growth pace provides a strong argument for an eventual consumer retrenchment.”
Index This week This month Year to date
Dow industrials -0.33% +0.59% +13.55%
Nasdaq composite -0.17% +2.46% +38.90%
S&P 500 -0.27% +1.05% +15.78%
Household debt is hardly the only hurdle facing economic growth, but it looms large in an economy that is failing to create jobs. Hatzius called rising household debt the “most important factor” likely to restrain consumer spending next year, although he also cited a “somewhat restrictive fiscal policy” compared with the huge boost provided by this year’s federal tax cut and advance refund.
With consumers having tapped out their home equity, any significant growth in demand for goods and services will have to come from new jobs. But news on that front has been discouraging.
The economy lost another 93,000 jobs in August, the seventh consecutive month of job losses, defying predictions that payrolls would rise by about 5,000. About 422,000 people filed initial claims for unemployment benefits in the latest week, the third straight week the figure has risen, dashing last month’s hopes that the labor market was stabilizing.
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“The pace of layoffs may have slowed down, but we still do not have job creation,” said Mary Ann Hurley, a bond trader for D.A. Davidson in Seattle. She expects strong economic growth through the fourth quarter but questions what will happen early next year, when the stimulus from the recent one-time tax refund checks is no longer boosting consumer spending.
The other logical place to look for growth is in business investment, but Merrill Lynch economist Ron Wexler cautions against expecting too much from the nation’s big companies.
In a recent series of reports, Wexler analyzed profits of companies in the S&P 500 and noted that while gross profits are up 8.5 percent since the end of the recession in late 2001, cash flow from operations is up only 2.6 percent. Profits have been boosted by foreign currency translation but also by declining depreciation costs, suggesting to Wexler that companies are depreciating their assets over a longer period of time.
“Taken together, these results suggest that (capital spending) growth will be limited to a replacement cycle for the foreseeable future, which means that this economic recovery will feel subpar well into 2004,” Wexler said.
None of this is to suggest that the economy is in danger of slipping into another recession. The economy has been expanding steadily since late 2001 and is likely to continue expanding.
“We definitely see a cyclical upturn here,” said Wexler. But he noted that by historical standards, the economy should have added 5 million jobs by this point in an expansion. This time around, the economy has lost nearly 1 million jobs since the recession ended.
“There is a lot of structural excess here,” Wexler said. “We think the economy is going to continue to struggle to grow at trend rates.” |
