Silver lining of shrinking economy: consumer spending up

The potential for households to add to GDP is constrained by the decline in personal wealth during the recession. For many families, lost wealth in home values and retirement accounts means that a priority now is to pare debt, control spending, and rebuild savings.

Still, in the first quarter Americans were able to expand their savings rate even as they boosted spending. Savings rose to 4.2 percent of overall disposable income, more than double the savings rate in 2008 and far above the prior two years.

Meanwhile, the modest rise in consumer spending helped investors to see some hope, despite the overall GDP decline.

“Recovery can occur as over 90 percent of workers are employed, and their spending can move the economy forward in the second half of this year,” Dallas economist Michael Cosgrove writes in a new edition of his market newsletter, The Econoclast.

Stock indexes rose modestly Wednesday morning, following the release of the economic numbers.

Even as consumers held their own, the GDP report showed sharp declines in other areas of the economy, especially business investment. Firms put expansion plans and other purchases on hold as they waited for clearer signals on the economy’s direction.

Also, businesses slowed production of goods as they tried to work through excess inventories.

Even though these business investment and inventory activities are a much smaller share of overall GDP than consumer spending, the retrenchment by corporate America was so sharp that it outweighed the gains in consumer activity.

That was the main reason for the drop in GDP. Government spending also fell, due to a drop in state and local government outlays and in federal military spending.

If consumers are setting the stage for a turnaround in GDP later this year, that doesn’t mean a quick rebound in one key barometer of the economy, the job market. Typically, unemployment keeps rising even as a recession bottoms out.

Several burdens on the economy could make it hard for employers to begin rehiring at a rapid clip: the tepid pace of consumer spending, the global scope of the slowdown (affecting demand for US exports), and a tougher credit climate.

Even with the March rise, the consumer mood remains very low, even compared to the last two recessions.

Thus, what’s happening now may be small steps toward a slow economic recovery.

Along with the consumer progress, other steps include:

• Confidence of corporate chief executives improved modestly in March, according to Chief Executive magazine.

• The Federal Reserve has expanded the supply of money available as fuel for growth.

• Credit markets have shown some signs of stabilization, aided by support from the Fed and Treasury Department.

• The large fiscal stimulus signed by President Obama this spring is ramping up, offering a boost from government spending this year and next.

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