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RealMoney.com: Tony Crescenzi Blog
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Oil Drop Affects Consumer Consumption

By Tony Crescenzi
RealMoney.com Contributor

1/12/2007 1:51 PM EST
Click here for more stories by Tony Crescenzi
 



There are some who say that because the consumer was not affected by the high cost of energy, the decline will have no beneficial effects. The fact is, though, that high energy costs did hurt the consumer last year, but because of other factors -- such as the strong growth in personal income growth -- consumer spending nonetheless increased.

Keep in mind that personal consumption increased at a relatively slow 2.8% rate in the third quarter and by 2.6% in the second quarter, slower than the 3.6% average rate of gain seen over the past fifteen years. So, perhaps now the energy price drop will help bring spending back to 3.6%. Many are already forecasting a gain that strong for last quarter and in the current quarter.

One percentage point of growth is a big deal. If productivity increases 2% per year and labor force growth is 1%, then the economy can grow at 3%. Any less than that would mean that businesses would have excess capacity. In this case they might shed workers and cut capital spending. Growth of more than 3% changes the dynamic, with companies needing more workers and equipment to handle the increased demand. The increased income this brings is what sustains the economic expansion.

It is possible, however, that the increased spending that comes from the decline in energy costs will be offset by the household sector's desire to raise its savings rate, which went into negative territory as a result of home equity withdrawals.






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Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.

TheStreet.com has a revenue-sharing relationship with Trader's Library under which it receives a portion of the revenue from purchases by customers directed there from TheStreet.com.

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