RAPAPORT... Bumps in the road have not dramatically jarred the U.S. economy.
Two developments in late February and early March could have had a negative impact on the nation’s economy and consumer spending — but seem not to have. The nation appears to still be in what some call the “Goldilocks” scenario — an economy that is neither too hot nor too cold.
One development was a downward revision of economic estimates for the nation. The other was some dramatic drops in the stock market, both in the United States and overseas. There were a few other developments that could tighten consumers’ holds on their wallets — oil prices creeping up, some basic price increases that could heat up concerns about inflation and former Federal Reserve Chairman Alan Greenspan almost casually remarking that recession might be possible.
GOING DOWNThe downward revision of the nation’s gross domestic product (GDP) was expected. GDP — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 2.2 percent in the fourth quarter of 2006, according to preliminary estimates released by the Bureau of Economic Analysis (BEA) at the end of February.
That estimate was revised downward from the initial, January 31 estimates of the nation’s growth, which had put GDP at 3.5 percent. But it was still lower than some observers had expected.
“It was a little more downward than widely expected,” says Greg McBride, senior financial analyst for Bankrate.com., a major online aggregator of financial rate information. He compares it to expecting a six-inch snowfall and getting a foot of snow instead.
Still, McBride did not expect these latest results to have a negative impact on consumer spending, the economy’s main driver. A third — and final — set of estimates was scheduled for release at the end of March.
“My money is on the consumer,” McBride says. That’s because what he considers the real pocketbook issues — employment, household income and unemployment — are good. Unemployment remains low at 4.5 percent. “Personal income continues to rise and people are spending all of that,” he says.
TRANSITIONMcBride admits that the economy is in a bit of a transition stage right now. “And that transition leads to some uncertainty and uncertainty breeds volatility,” he says. “It’s like a string of dominoes. That’s why there’s volatility in stocks and concern about what effect housing will have on the economy. But the economy is still growing at a pace that’s respectable, interest rates are low on a relative basis, fixed mortgage rates are even lower. We just need a little bit of time to see how the transition plays out. We’re still looking at the soft economic landing scenario.”
Scott Hoyt, director of consumer economics for Moody’s Economy.com, says that he had considered the January 31 estimates high and found the February 28 estimates more in line with his expectations. “We were expecting the economy to slow down and, in fact, were very surprised by the initial GDP for the fourth quarter. We thought that was surprisingly strong and the revisions were more in line with what we were expecting,” he says. “For us, the pace of economic growth is coming in relatively in line with what we had been expecting. The housing market is of sufficient weight to slow growth in the economy but not stop it.”
The slowing housing market means slower growth of consumer wealth. Hoyt sees some negatives in that for retailers. “Discretionary items tend to be more driven by changes in wealth than necessities are,” he says. But Hoyt doesn’t consider that a major concern, at least for the moment.
“That said, in the very short term, we obviously had a very strong annual bonus season again this year, which will be a support at least for the near term for discretionary spending,” Hoyt goes on to say. Bonuses were strong again this January, with 20 to 25 percent increases. That came on top of big increases last year, which meant that the 2007 increases were on a big base, making them significant. Hoyt says that recent increases in personal income were not supported by job growth, so many observers are assuming that that jump in income came from bonuses.
Hoyt was sanguine about recent stock market fluctuations. “It takes more than just a stock market correction to disrupt the economy. If it were to lose 20 or 30 percent, that might have implications,” he says. “Consumers adjust their spending based on changes in all forms of wealth, not just housing. But most studies find that consumers respond more to housing wealth than equity wealth because housing is not as volatile as equity gain or loss.”
On top of that, despite some recent bumps, long-term data supports the belief that the stock market generally goes up. “If you look at the stock market over periods of 20 years, historically it’s been the best investment, bar none, over the long run,” Hoyt says. And that includes periods with dives, such as 1987 and even the Great Depression. However, he’s not sure if consumers recognize that. Nonetheless, Moody’s baseline forecast for 2007 continues to be the soft landing it initially forecast.
FOCUS ON FINANCESLike McBride, Hoyt finds that consumers are primarily focused on what’s happening with their finances — their income, their job security, their wealth accumulation and their debt burden. Obviously, events in the general economy impact such personal factors.
Gary Drenik, a partner with BIGresearch, a marketing research firm, believes that stock market fluctuations can cause economic anxiety among consumers. “They’re not as positive about job security and income,” he says.
The late February/early March fluctuations went from being a CNBC story to a general news story that caught the attention of a broad swath of the public. However, Drenik didn’t expect a strong impact. “Things seem to have leveled off and there’s been an upward trend. The story kind of faded,” he says.
Unemployment Rate
December 2006 January 2007 February 2007
4.50% 4.60% 4.50%
The jobless rate has remained witin a narrow range — 4.4 to 4.6 percent — since September 2006. Source: Dept. of Labor Bureau of Labor Statistics
Gross Domestic Product (GDP) Statistics — Fourth Quarter 2006
Percent Change from Preceding Quarter
Advance Estimate Preliminary
Real GDP 3.5 2.2
Current-dollar GDP 5.0 3.9
Gross domestic purchases price index 0.1 0.2
Source: Bureau of Economic Analysis
Article from the Rapaport Magazine - April 2007. To subscribe click here.