Why Consumers Can’t Keep Driving the Economy

0
37

The U.S. economy posted another healthy quarter but one of the key drivers of growth is starting to look unsustainable.

Gross domestic product grew at 2.6% annual rate in the fourth quarter, the Commerce Department said Friday. That was slower than the 3.2% it clocked in the third quarter and the 2.9% that economists expected.

A quick look under the hood shows that when it comes to demand, things are doing just fine. Personal spending grew at 3.8% rate, setting its fastest pace in three years, while capital spending growth hit 6.8%. The drags came from companies adding less to their inventories and an expansion in the trade deficit. Really, this just counts as a payback for the third quarter, when inventories and trade boosted growth.

The concern is whether demand will stay strong. Consumer spending has been regularly outpacing income growth and, as a result, people are saving less and less. The personal saving rate (the share of after-tax income that isn’t spent) fell to 2.6% in the fourth quarter from 3.3% in the third quarter. That compared with 6.1% two years earlier and was the lowest level since 2005, when the housing bubble was at its height.

The drop in the saving rate might be a sign of confidence that workers believe they will soon be getting paid more. That makes sense with the labor market looking tight, and companies passing out bonuses. Higher pay would give assurance that economic growth could continue.

But if the recent burst of corporate largess proves to be more public relations than real wage increases, look for consumers to pull back. Without solid consumer spending, economic growth will likely slow.

Write to Justin Lahart at justin.lahart@wsj.com

Source

LEAVE A REPLY

Please enter your comment!
Please enter your name here