Why We're Still Spending After All These Tears

  • Share
  • Read Later

They're window-shopping — and stepping inside to buy, too

And the consumer marches on. Retail sales posted a 0.8 percent for April, the largest gain in three months, the Commerce Department said Friday, thanks to strong auto sales (up 1 percent) and sales of durable goods (up 0.7 percent). And the Labor Department reported that the Producer Price Index, which measures prices at the wholesale level, rose just 0.3 percent, most of that coming from the spike in gasoline prices.

The markets sighed a bit at the opening, worried about the Fed not worrying so much, but the big question remains: Could the economy be still growing? In a TIME.com Q&A, TIME senior economics reporter Bernie Baumohl takes a look at the numbers and takes a stab at the Fed's move Tuesday.

TIME.com: What's it all mean?

Bernie Baumohl: These were both surprising numbers, but the biggest surprise is retail sales. We've gotten a whole bunch of different signals lately about whether we're slipping into a recession or still growing. And these retail sales numbers would seem to indicate that consumers remain the heroes of this economy. So far, we appear to still be averting a recession.

As far as the PPI goes, inflation still looks pretty well contained, especially in this economy, which is still slow. Consumers are still calling the shots, and that's going to make it hard for price pressures to be passed up to the retail level. So this isn't going to worry Greenspan too much.

Why do we keep being surprised by the fact that consumers are still spending?

What's perplexing about this consumer resilience is the dichotomy between consumer sentiment and consumer behavior. Now, it's impossible to consistently predict consumer behavior — always has been, always will be. But consumer confidence has been consistently trending downward for a year now, and yet retail sales are up more than 3 percent since April of last year.

Consumers are clearly crucial — they make up two-thirds of U.S. economic activity, and they're the only sector keeping us out of a recession. So what are we missing?

First, consumers may have become less hung up on what their portfolios are doing when it comes to their everyday spending habits. The NASDAQ bubble-burst is more than a year old, and perhaps they've come to grips with it.

Over the years, consumers have become very savvy about the markets and the economy, and they realize that over the long haul their household wealth has still increased exponentially. And in the last few months they've seen both the Dow and the NASDAQ come back rather nicely from their lows, and they've absorbed the lesson that between the Fed and the normal gyrations of the business cycle, things will pick back up.

Second, consumers have also become very savvy about debt. With interest rates falling sharply at the start of this year, mortgage refinancing is up 500 percent over last year. That lowers people's monthly payments, and puts money in people's pockets. Whether they use it to pay down credit card debt or spend directly, it's an improvement in their day-to-day financial situation, no matter what their portfolios are doing.

Third, you've got to remember that while unemployment is 4.5 percent and rising, it's still low in relation to all past business cycles. And people who are working are going to continue to spend.

And fourth, I think people have become very confident in Alan Greenspan. He's been at the forefront of the boom of the last eight years, and he's clearly committed to staving off a recession — or at least minimizing it — with interest-rate cuts. I think people have a general sense that he'll succeed.

And on that note, your Fed prediction?

I still think 50 basis points (half a percent). Friday's numbers are encouraging, but there's still the possibility that unemployment will continue to tick up and eventually break consumers' spirits. So Greenspan won't take any chances on disappointing them Tuesday.