Consumer spending is increasing
Everyone likes to talk about the latte factor when it comes to saving money. You know the theory: You could fund your retirement if you give up spending $5 a day at Starbucks, right?
But I ran across another latte factor a few weeks ago in northern Macomb County, Mich. I was sitting in a Starbucks with a friend who was recovering from surgery. We sat and talked and then got drawn into another conversation.
Look at all those cars and big trucks going through Starbucks’ drive-through.
We wondered: What recession?
Lately, the latte factor to me indicates that more than a few people feel freer with their money. You may be stunned some days when you need to work harder to find parking at some malls or restaurants — places where there was absolutely no wait just two years ago.
Is the consumer back in business?
“The consumer is consuming, or at least starting to pick up his pace of consumption,” said Paul Traub, business economist for the Federal Reserve Bank of Chicago’s Detroit branch.
Personal-consumption expenditure numbers were up 4 percent in the fourth quarter from the third quarter last year, he said.
During the depths of the recession, on an inflation-adjusted basis, those numbers had fallen by more than $225 billion, or the equivalent of 2.4 percent from their previous peak.
It has taken more than two years, Traub told me, but personal-consumption expenditures finally have reached a new inflation-adjusted peak.
What’s more significant is that consumers are buying durable goods — not just replenishing shampoo or other everyday necessities.
Spending on durable goods was up 21 percent in the fourth quarter of 2010 on a quarter-over-quarter basis, and by contrast was down 22.3 percent in the fourth quarter of 2008.
Surging prices for food and gas, of course, make everyone edgy.
Right now, though, many consumers have not retrenched and slashed spending in other areas based on concerns about rising prices, Traub said.
Many consumers are more willing to spend for three reasons: jobs, stocks and debt.
One, we are seeing some job growth, particularly with more-optimistic forecasts in Michigan. Michigan reportedly is the top state in the country for job- creation improvement, according to a Gallup survey of state job markets.
Two, the stock market has been doing well.
And finally, some consumers are not as burdened by debt as they used to be. Mark Zandi, chief economist for Moody’s Analytics in New York, said household debt and debt loads continue to decline.
Credit quality on consumer loans, including auto loans and even mortgage loans, is improving quickly.
Despite jitters about gas and food prices, Zandi said consumers are doing their part for the economy because the job market is improving and the stock market is holding firm.
What happens if the country hits $4-a-gallon gas and stays there?
At $4 a gallon, Zandi said the U.S. economy would see meaningful damage to consumer spending. But he says the economy could continue to grow.
Zandi estimates if we hit $4 a gallon this spring and stayed there, it would be like a $125 billion tax for the rest of 2011. It would more than gobble up any extra money consumers are seeing in their paychecks for the temporary payroll-tax holiday.
So we take two steps forward and one step back.
We’ve got about $230 billion that has been freed up for spending, as consumers need less of their disposable income to service consumer debt.
But we’d lose $125 billion out of our pockets to pay for higher gas prices at $4 a gallon.
Yet consumers likely would continue to spend, Zandi said, because companies are expected to continue to hire and add jobs.
Traub added that he expects the upward swing in gas prices to be temporary, noting that the price increase is driven by speculation because of events in the Middle East.
“I do not believe that it will lead to a sustained increase in energy prices,” Traub said.
The U.S. economy could hit a roadblock, though, if gas prices continue to climb higher.
At $4.50 a gallon, Zandi warned, the risks of another recession rise significantly.
To get to that level, Zandi said, some event would be undermining stock prices and driving up gas prices.
Think about how you feel when you drive by a gas station and spot gas at $3.88 a gallon. Picture the shock of $4.50, and it’s logical that consumers would be far more frightened.
And yes, I’d bet we’d be seeing far fewer consumers willing to wait in line for those lattes.
Susan Tompor is the personal-finance columnist for the Detroit Free Press. She can be reached at stomporfreepress.com.
2011, Detroit Free Press
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