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US spending to slow -- just don't tell the shoppers

US spending to slow -- just don't tell the shoppers
Fri Jun 17, 2005 01:38 PM ET
By Andrea Hopkins

WASHINGTON (Reuters) - Economists offer any number of reasons why the U.S. consumer will soon start cutting back on spending -- high energy prices, rising interest rates and a predicted easing in the housing boom among them.

But consumers themselves aren't so sure.

"I'll probably spend more this year," predicted Mardiko Ellison, 39, as she shopped for clothes at Filene's Basement in downtown Washington. Ellison, a budget analyst for the federal government, bought a house and a car last year, and said she's slowly filling her home with new things.

Across the aisle in the handbag department, Janet was too embarrassed to give her last name.

"I'm ashamed of what I spend," she protested. "I shouldn't be spending anything, because I'm saving to buy a house. But I like to look."

Moreover, she's not afraid to buy a home in the nearby Maryland suburbs at what some experts believe is the peak of a housing bubble.

"I think interest rates are good right now. Houses are already too expensive, but if prices keep going up it's going to be impossible to afford," she said. "So I think now is a good time to buy."

Persistently low borrowing costs have helped fuel the boom in U.S. consumer spending since the 2001 recession. The average rate for a 30-year mortgage was just 5.6 percent last week, lower than it was a year ago, while auto dealers continue to offer rebates and free financing on many car purchases.

All that borrowing has burdened households. Data released this week by the Federal Reserve showed household debt rose at a 9.3 percent annual rate in the first quarter to $10.5 trillion dollars -- about the equivalent of the entire nation's economic output in a year.

Another measure showed it costs families $13.40 out of every $100 in disposable income just to meet debt payments.

DON'T FEED THE GORILLA

Borrowing money really isn't supposed to be this cheap this far into an economic expansion, and many analysts believe the deals can't last much longer.

Fed Chairman Alan Greenspan said the failure of long-term borrowing costs to rise despite Fed moves to triple overnight interest rates in the last year is "a conundrum" -- a term many took as a warning to bond traders.

Anthony Chan, senior economist at JPMorgan Asset Management, said consumers have been right to take advantage of low rates by refinancing their homes or taking out home equity loans. But eventually long-term interest rates will go up, cutting off access to cheap money.

Together with high energy prices, that should be enough to take some momentum from consumer spending, which grew 3.8 percent in 2004 -- faster than the 3.5 percent increase in disposable personal income.

Economists surveyed for the June edition of the Blue Chip Economic Indicators newsletter forecast growth in real personal consumption expenditures would slow to a 3.6 percent pace this year and 3.0 percent in 2006.

But they've been predicting just such a slowdown for a while. Last June they believed spending growth would slow to 3.2 percent this year, and have had to revise this steadily higher each month as shoppers defied the cautious outlook.

Still, when it does come, a slowdown in consumer spending, which accounts for two-thirds of overall U.S. economic activity, will be widely felt. While some economists grumble about American fondness for material goods and ever-increasing debt, that consumer appetite is what has kept the U.S. economy steaming ahead while Europe and Japan struggle to keep pace.

"Consumer spending is the 500-pound gorilla in the GDP account, so if consumer spending slows ... we'll have to accept growth will be a little weaker, it won't be the 4 percent plus that we had last year," said Chan.

Blue Chip forecasters expect gross domestic product growth will slow to 3.5 percent this year from last year's 4.4 percent pace, and edge even lower to 3.3 percent expansion in 2006.

For her part, Mardiko Ellison is ready to do what is necessary for the economy.

"It's summer, and I have an 8-year-old who is outgrowing everything," she shrugged.


LINK: http://www.reuters.com/newsArticle.jhtml;jsessionid=FNTBQSBDKQEACCRBAEKSFFA?type=reutersEdge&sto...