Several recent data points indicate consumer confidence is on the mend, promising signs of an economic recovery.
The Commerce Department reported today a 0.7% rise in consumer spending for last month, which is a good turnaround from the 0.6% decline in September.
With income also up 0.2%, marking the second month of rising income, and the best performance yet since the August jump of 1.3% when the Cash for Clunkers program kicked off, the spending environment is starting to loosen.
Because consumer spending accounts for nearly 70% of economic activity, this rebound in spending is a good indicator of the resilience of consumers. This sentiment was echoed by President of ClearView Economics, Ken Mayland who warned not to “count consumers out”, urging that they are making a significant “contribution to the recovery”.
Fed officials and other leading economists however remain skeptical regarding other fundamentals like unemployment and the tightness of credit markets. If consumers cannot borrow to finance homes and other major purchases, it could lead to a flagging recovery.
With Wednesday’s spending data painting a rosier picture though, the fear of a second major dip emerging in the recession waned marginally despite the nagging concern over how slow spending may be next year.
Consumer spending beat estimates by 0.2%, with income remaining unchanged, forcing savings (as a percentage of after-tax income) down to 4.4% in Oct., off from 4.6% in September.
Durable goods (cars, appliances, etc.) attracted the most spending of any category, and were up 2.1% last month after falling 8.5 percent in September.
Spending on “nondurables”, like food and clothing, was off somewhat, falling from 0.7% in Sept. to 0.4%, a potential indicator that people’s fears of a major downturn occurring have softened. While the Commerce Department report did not offer details for specific goods, it did contain information showing the service sector rebounded slightly as well, with consumers putting in an additional 0.2% to add to September gains.
Excluding food and energy, inflation rose 1.4% last year, falling comfortably within the Fed’s accepted range, prompting the Fed to maintain record-low interest rates, in order to nurture the recovery. Many economists foresee interest rates remaining low through the year and into part of 2010.
A 2.8% growth rate in the economy last quarter, after falling for four quarters in a row, was reported by the government Tuesday. While many economists expect growth to slow next year, claiming a floor of around 1%, Ken Mayland went on record as saying this year could close out as high as 3% depending on how loose people are over the holidays.