Consumer Products & Services

Positive Trends In Consumer Spend

Some positive trends in consumer spending also indicate that the recession is abating in the U.S. On a quarter-to-quarter basis, the personal consumption expenditure index climbed 1.3% in the second quarter of 2009, compared to a drop of 1.5% in the first quarter. Pending home sales (PHS) index, which tracks signed purchase contracts, surged 6.4% in August to 103.8, following rises of 3.2% in July, and 3.6% in June. Pending sales were 12.4% higher in August compared to the same period last year. The increase in August marks the seventh successive rise in pending home sales, and the index is at its highest level in more than two years. Recent data shows that the housing market is starting to dig out from a three-year slump. The collapse of the housing market was the main trigger of the worst recession in the U.S. in 70 years. A recovery in the housing sector would also improve the confidence level of U.S. households, whose net worth had been affected by the plunge in home values. This in turn could encourage consumers to spend more rather than sticking to their savings plan.

The Institute for Supply Management’s (ISM) manufacturing numbers for September (52.6), following the strong reading in August (52.9), are among the most bullish signs validating that the recovery is real and likely to be sustainable. The strength in the recovery is reflected in the rise in the industrial production for the third consecutive month in September, by 0.7%, more than the market expectations of a rise of 0.2%. The August industrial output growth was revised from 0.8% to 1.2%. These numbers indicate that factories are revving up production to offset the sharp decline in inventories among wholesalers and retailers. Both the ISM and pending home sales are important economic indicators and portray an economy that has probably shaken off the last vestiges of recession.

According to the last Federal Reserve's Beige Book survey, most of the 12 Federal Reserve districts reported that the pace of economic decline in their respective regions has moderated or begun to stabilize. Though consumer spending is still down from last year’s levels, many districts cited flat, modest, or slightly better sales results for the survey period.

Despite indications of a general economic improvement, there remain some pockets of worry, especially relating to the nature and structure of the recovery. The slower rate of decline in U.S. GDP in the second quarter of 2009 versus the prior two quarters was primarily due to a reduced rate of inventory de-accumulation. Consumer spending, which accounts for about 70% of the economic activity in the U.S., dropped at an annualized rate of 1.2% after rising at a rate of 0.6% in the first quarter. Consumer confidence still appears fragile as job losses in the U.S. continue to mount, and people grapple with reduced savings and the soft housing market.