Media Moves

Coverage: A U.S. saving economy?

June 2, 2015

Posted by Liz Hester

While it might not be the end of the consumer-driven economic growth, this quarter more people were putting money away instead of spending it, particularly on big ticket items. It might be good news for some, but could put a damper on the economic recovery.

The Reuters story by Lucia Mutikani had these details about consumer saving trends:

U.S. consumer spending growth unexpectedly stalled in April as households cut back on purchases of automobiles and continued to boost savings, suggesting the economy was struggling to gain momentum early in the second quarter.

But after a slump in economic growth in the first quarter, there are signs of a rebound, with other reports on Monday showing manufacturing activity picked up in May for the first time in seven months and construction spending surged in April to a near 6-1/2-year high.

Still, sluggish consumer spending growth this year and muted inflation pressures suggest the Federal Reserve may not raise interest rates until later this year.

The Commerce Department said April’s unchanged reading in consumer spending growth compared with analysts’ forecasts for a 0.2 percent rise and followed a 0.5 percent increase in March.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, was also curbed by weak demand for utilities such as electricity and natural gas as temperatures warmed up.

But Patrick Gillespie wrote for CNN Money that consumers aren’t feeling confident enough yet to spend:

People in the U.S. spent less in April than they did in March, according to the latest data from the Commerce Department. It’s hardly a new trend. Americans have been hesitant to buy much at the store or elsewhere for months.

Instead, they have been increasing their savings. The annual savings rate, now 5.6%, is higher than it was a year ago, and significantly higher than the pre-recession norm of around 3%, according to the Federal Reserve.

“Americans barely pried open their wallets in April,” Jennifer Lee, senior economist at BMO Capital Markets, wrote in a note to clients.

That’s important because American spenders make up the majority — about 70% — of economic activity in the country. If people don’t spend, the economy doesn’t grow.

The USA Today story by Paul Davidson said some consumers think gas prices will stay low, meaning they’ll open their wallets:

In a report Goldman Sachs says consumers initially believed low gas prices were fleeting but recently became convinced they’ll stick around, portending a pickup in spending this year.

LaVorgna says strong job growth – averaging nearly 200,000 a month so far this year and 260,000 in 2014 — and faster wage gains in coming months will also fuel stronger consumption.

Other sectors are rebounding. Construction spending surged 2.2% in April after slumping through the harsh winter, Commerce said, soundly beating the 0.7% increase forecast by economists. Outlays for home building increased 0.6%, and non-residential projects jumped 3.2%.

An index of manufacturing activity, meanwhile, rose to 52.8 from 51.5 in April, the Institute for Supply Management said, the first increase since October. A reading above 50 indicates that the sector is expanding.

Michelle Fox wrote for CNBC that the numbers are backward looking and shouldn’t be taken as the complete economic picture:

Jeffrey Cleveland, chief economist at Payden & Rygel Investment Management, said that while he is a little worried about the latest consumer spending numbers, he doesn’t want to make much of the April data because it is backwards looking.

“I don’t want investors to look at April personal spending data and then make huge extrapolations about what’s going on in the U.S. economy. We think things are fine,” he said.

He also doesn’t think an interest rate hike by the Federal Reserve will derail the recovery.

“Those that think that a 25 basis point increase is going to pull the carpet out from under, I think, are wrong,” Cleveland said. “It’s a $17 trillion economy. It can withstand that.”

But for now, the lack of consumer spending is a drag on the economy, according to The Associated Press story by Martin Crutsinger:

Consumer spending slowed to growth of just 1.8 percent in the first quarter, down from spending growth of 4.4 percent in the fourth quarter. The frigid cold in many parts of the country kept shoppers away from the malls. With the arrival of spring and warmer weather, analysts are looking for spending to rebound.

The weakness in April, the first month in the new quarter, reflected big declines in spending on both durable goods such as autos and nondurable goods such as clothing and food. Spending on services, which cover utility bills and rent, edged up 0.2 percent.

Recent employment gains are expected to fuel spending. The economy created 223,000 jobs in April, pushing the unemployment rate down to a nearly seven-year low of 5.4 percent.

The Federal Reserve has kept a key interest rate at a record low near zero since December 2008 in an effort to combat high unemployment. Even though the job market has revived, the Fed has left rates alone in part because inflation for nearly three years has been running below the Fed’s 2 percent target.

For many years, we’ve written about the debt load of American consumers and how it is hurting their long-term economic stability. It seems that message may have come through as people put more money in the bank than into consumer goods. The best for the economy would be finding a balance between hoarding and reckless spending.

 

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