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.
P.S. CRAMER: KASS'S CALLS "RIGHT AS RAIN"
Jim Cramer says, "I start my day reading Doug Kass because he's been right as rain." To benefit from Doug Kass's forecasts, get RealMoney Silver, the only place where you'll find his exclusive Trading Diary. Try it FREE today.
P.S. Will you be there when Cramer makes his next move?
Strong brands and companies with vast market exposure can help bolster your portfolio. Jim was able to lock in a 64% gain by buying Ingersoll-Rand at $13 and selling at $22.50. Action Alerts PLUS members were the first to see these moves. Were you among them? Free access today!
P.S. BREAKING NEWS: Cramer's Portfolio beat 9 out of 10 of the ten largest mutual funds rated by Morningstar and Lipper in Q1. I want your portfolio to do just as well, so I'm inviting you to trade with Cramer for free right now.
Tony Crescenzi Blog Inventories Are Stabilizing 1/12/2007 10:40 AM EST Slower pace will be beneficial for growth.
Tony Crescenzi Blog Consumer Pushing Fed to Sidelines 1/12/2007 9:55 AM EST Retail sales momentum is on the upswing, and this could drive bonds further downward.
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.
RSS FEEDS
PODCASTS
