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We cover the latest consumer spending data issued by the U.S. government for February 2011:
Consumers increased their spending by 0.7% in February 2011, which follows on from a 0.3% increase in spending reported for the month of January. Whilst the increases in consumer spending is good news for the economy, there are several worrying issues which ought to be addressed.
When an economy transitions from recession to recovery, the greatest fear is that price inflation will outstrip the ability of consumers to buy goods and the recovery will slide back into recession. There is a very delicate balancing act with the need to maintain price stability and business recovery, but at the same time to ensure that price inflation is curbed because this in turn leads to higher interest rates and this dampens down any economic revival.
The fact that consumers are prepared to spend more money is the most heartening sign of all. The fact that people feel more secure in their jobs and financial situation is allowing them to consider greater expenditures, however there is a sting in the tail with this data.
The extra money for spending is coming from consumers accessing savings and using credit to meet the gap between their incomes and the cost of goods they are buying. A major component of the increase in consumer spending is the price of gas – with gas knocking on the $4 per gallon level, and fears of a $5 a gallon price level this year, the cost of motoring is going up. Once you appreciate the masking effect that the cost of gas is having on total amount of consumer spending, the strength of the economic recovery is put into perspective.
If more money is simply going into gas tanks rather than buying goods and services, then the recovery cannot be as strong as the data tells us. The good news is still that consumer spending on goods and services is also rising, even after taking into account the chunk allocated to gas costs, but it is a delicate set of increases in spending which could be simply wiped out if price inflation starts running rampant.
The bottom line is that while we are on the road to recovery, as can be seen from new job hires within the trucking industry, increasing driver rates and unfortunately, increases in the cost of diesel at the pumps, the whole economic outlook is still very fragile.
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