By Julie Strickland
The consumer-spending boom isn’t over, but it is on shaky ground.
Salaries and wages are expected to reflect a continued increase for the month of March, but a modest one of around 2.5 percent. Consumer spending will grow around 0.6 percent, a solid but smaller rise than February’s 0.8 percent jump. Consumers will continue to spend despite this marginal increase in their disposable income, and personal savings rates will continue to tumble.
The urge to splurge during the latter part of the first quarter can be attributed to two main factors. Unseasonably warm weather gave consumers a jumpstart on a surge normally seen later in the spring, and a slowly but steadily improving job market has given consumer confidence a boost. 240,000 jobs were added in February according to the Labor Department, a revised number that is slightly better than previously thought.
In this environment, workers aren’t seeing the layoffs that spooked them a few months back. Joel Naroff, president and founder of Naroff Economic Advisors, credits this with spurring consumer confidence.
“People are seeing in their own businesses that layoffs aren’t occurring,” Naroff explained. “If you look to your right and one person is gone, you begin to worry. When you look to your left and the other person’s gone, you really begin to worry. Now they’re looking both ways and seeing that everybody’s still there.”
Though a decrease in layoffs is an encouraging sign, the economy hasn’t seen the kind of job growth hoped for in the first quarter. And wages are growing, but not dramatically enough to keep pace with spending. If income continues to fall short, consumers will dip into their savings and tap credit lines to continue shopping.
This has serious implications for continued economic growth in 2012, as consumer activity was crucial to overall GDP growth this first quarter. It accounted for much of the 2.2 percent boost, according to Jim Baird, chief investment strategist for Plante Moran Financial Advisors. This rate of growth is lower than the 2.5 percent economists predicted, but the growth we did see was largely sustained by personal consumption. At 2.9 percent, personal consumption made its strongest showing since the final quarter of 2010, according to the Bureau of Economic Analysis.
Millan Mulraine, senior U.S. macro strategist with TD Securities, expressed concern about the importance of personal spending in an environment where consumers are reaching beyond their means.
“The question in my mind is how sustainable this is,” Mulraine said. “It’s going to be difficult for consumers to continue to spend at that pace, having depleted their savings significantly.”
Future consumer spending hangs largely on job creation, which in turn relies on business investment. It’s a sector that has made a poor showing as of late. Investment in equipment and software decelerated rapidly in the past six months, and investment in structures slipped by 12 percent, according to the Bureau of Economic Analysis. This reduction is severe enough to drive overall business investment into negative territory for the first time in over two years.
This unwillingness to invest suggests that the corporate sector may not have the same confidence in continued economic recovery that consumers are demonstrating. And if businesses don’t expect growth to continue, they’re unlikely to take on the expense of many new hires.
“We are looking for 162,000 jobs to be created in April,” said David Semmens, senior U.S. economist with Standard Chartered Bank. “So while the economy is on the mend, there is still a long way to go.”