Photo: Bloomberg TV
The Federal Reserve raised its growth forecast for the U.S. economy yesterday, and investors continue to be relatively bullish on the stock market. However, Gary Shilling says it’s consumers that set the tone for the economy, not investors.The U.S. economy has been driven by strong consumer spending in recent months, Shilling writes in The Christian Science Monitor, but this spending is not sustainable. He points out 4 key signs
- Consumer spending increased 0.8 per cent in February and retail sales rose 1.1 per cent. But this pace isn’t sustainable since personal income growth is still weak and “consumer spending is being fuelled largely by increased debt and further dipping into savings.”
- Housing activity is still weak and homeowners are still losing their homes to foreclosures. Moreover, they’re losing their “desire to buy an asset that continues to fall in price.”
- Employment has increased because American businesses have run out of productivity enhancement that previously let employers increase productivity with a smaller workforce. But there were only 120,000 non-farm jobs created in March, against expectations of 205,000.
- GDP growth has picked up in recent quarters but in the last quarter for instance this was driven by inventory growth which isn’t necessarily desirable
So Shilling reverts to his main point:
“…Consumer spending is the only major source of strength in the American economy this year. On the other side of the scale several weaknesses are piled up: State and local government spending remains depressed by deficit woes and underfunded pension plans; excess capacity restrains capital spending; and recent inventory-building appears involuntary.
So it should not come as a surprise if a consumer retrenchment tips the balance toward a moderate – and overdue – recession.”
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