On the heels of news about a slower US economy and talks of a recession comes the news that consumer spending has slowed despite a solid gain in personal income. I am hypothesizing that rising energy prices took most of the money since the personal savings rate remained in negative territory for two years in a row now. What is puzzling is that even when you take out the effect or gasoline prices, consumer spending was still down. Ouch!
What does it say about the future of the economy in 2007? Not much until we get the data for this quarter. Consumers have a habit of suddenly going on a shopping spree (retailers should start putting more sale signs in May).
While the Fed has done a pretty good job of controlling inflation but maybe it has pushed the interest rates way too high. While it would be nice if the Fed simply did nothing at its next meeting, it will be even better if it cut them by a quarter point, giving a boost to the housing market and sending a message to Americans that they can start spending again.
When I wrote earlier this week about the reasons for the strange phenomenon of a skyrocketing stock market but a slow American economy, I was not sure about the GDP numbers. Now the Q1 numbers are out and they don’t paint a very optimistic story. At just 1.3% growth rate (just for comparison, India and China are growing close to 10%), it appears that the “wealth effect” that was driving consumer spending is no longer working due to the continuing depression in the housing market (it is depressing for me to just look at the chart for my house on Zillow).
I also think that consistently higher oil prices (that affected us all through higher gasoline and heating oil prices) have taken a bigger pie of our disposable incomes and with nothing to make us “feel rich,” we are being cautious.
Is a recession on its way? I don’t like to play this game because it is a futile exercise but if you are a business leader working on setting your strategy, it is not a bad idea to do some scenario analysis. I think in the near term, we are simply behaving like a mature economy until a new economic driver kicks in.