Consumers Still In Wait-and-See Mode

The latest feedback on the state of the U.S. economy does little to boost confidence in the overall health of the world’s largest market. Growth for the first quarter fell far short of expectations registering a paltry 1.8 percent. For the previous three months, the economy expanded by a robust 3.1 percent but this trend is clearly on the decline.

Certainly the U.S. has faced recessions in the past and has suffered through sustained cycles of low growth but in each of these cases, there was always a secret weapon held in reserve – the might of the American consumer. Historically, the buying power of U.S. consumers accounts for about 70 percent of the total economy and there was always a sense that as soon as people started spending again, recovery was all but assured.

This time though, it feels very different; and not even the continuation of record low interest rates have proved tempting enough to entice consumers to open up their wallets.

There are a couple of reasons why this is so. Firstly, there has been very little improvement in the employment outlook. Prior to the recession, unemployment was in the range of 4.5 percent – after the onset of the crisis in late 2007 however, unemployment rose steadily peaking at 10.1 percent in October, 2009. A year and a half later, unemployment has improved only marginally to 9 percent and even this is in jeopardy based on the decline in the latest Institute for Supply Management’s factory index reading.

The true number of unemployed is actually much higher of course. The official survey used to arrive at the unemployment rate considers only those who reported that they were actively looking for work. Those that have quit looking, or those working part-time but would like to be full-time, are not counted as unemployed.

Regardless of the method to determine the unemployment rate, the simple fact is that the current unemployment rate remains double the rate considered “full” employment prior to the recession. On the plus side, the economy is finally creating new jobs; but at the anemic rate it is doing so, it will take several years to recover the jobs lost since 2007.

In May, just 38,000 new positions were created compared to April’s 244,000. Even those that are working are feeling vulnerable and in a bid to protect themselves, consumers are spending less while saving more.

The other factor hampering consumer spending is the rise in inflation. Driven by higher energy and food costs, these essentials are taking a greater chunk of total income leaving less for the non-essentials. Since January, inflation has been on a steady rise from 1.6 percent at the beginning of the year, to 3.2 percent in April.

The Consumer Price Index was up 0.4 percent in April with gasoline prices jumping 3.3 percent for the month. On a more positive note, commodity prices have retreated somewhat and the expectation is that inflation will ease as a result. While this will be welcomed by consumers, until we see a significant improvement in employment, it will take more than a slight easing in inflation to convince consumers to crank up the spending.

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