WEEK OF MAY 5, 2008--Consumer Continue to Spend

American consumers are incredible. At a time when the value of a home is uncertain and job prospects shaky, consumers haven’t abandoned the Shopping Mall. Though banks have less money to lend, the Federal Reserve and now Congress are taking up the slack. The Fed has opened its credit lines to banks so that they can borrow against the mortgage-backed securities they cannot sell.

Congress is already sending out $140 billion in rebates and other relief for consumers. And it is debating giving the Federal Housing Administration another $300 billion to refinance overpriced mortgages, if lenders will take a 10 percent haircut on those mortgages. This should help to stabilize home prices, since something like one-third of all mortgages exceed their home’s value.

Are we really in a credit crunch? One sign that this may be a short-lived downturn is consumers continue to borrow, and retail sales are picking up. Everyone is lamenting the high energy and food prices that now take a 17 percent bite out of their pocketbooks. But the Federal Reserve just reported that consumer’s increased their debt load 7.2 percent in Q1 2008, the largest increase since last fall.

Credit card debt increased a whopping $6.3 billion, while non-revolving installment loans (such as auto) increased $9 billion. Consumers must be feeling more confident to be borrowing that kind of money. In fact, this was the largest quarterly increase in consumer debt since 2003!

What caused all that borrowing? Consumers are beginning to shop again. Among 33 retailers that have reported their April sales, more than two-thirds exceeded estimates, while one-third missed their numbers, according to Thomson Reuters. Discounters led with Wal-Mart and Costco sales up 3 percent.

Another boost to consumers is that the April unemployment rate fell back to 5 percent from 5.1 percent, mainly because 90,000 jobs were added to the service sector. The total number of employed increased by 362,000, while number of unemployed decreased by 189,000, according to the Household survey.

Another encouraging sign is that the Institute for Supply Managers’ March service-sector index rose to 52 percent from 49.8 percent in February. This may be why those 90,000 service-sector jobs were added; mainly in education, health care and professional services.

Yet 110,000 jobs were lost in construction and manufacturing, a sign that the real estate downturn isn’t the only problem. But the first quarter Gross Domestic Product “advance” growth estimate may be revised upward from 0.6 to a 1 percent growth rate, due to a slowing of imports in the latest balance of trade figures.

A bright sign of future growth was that first quarter labor productivity jumped to 2.2 percent, as workers produced more with less hours worked. It will take such higher productivity to keep essential goods affordable in the midst of soaring food and energy costs.

© Harlan Green 2008