Advertisement
YOU ARE HERE: LAT HomeCollections

Data Point to Surprisingly Strong Finish for the Year

Economy: More consumer spending, stock rebound and renewed confidence has experts lifting 4th-quarter forecasts.

November 26, 1998|JOHN M. BERRY | WASHINGTON POST

WASHINGTON — The U.S. economy continues to confound the experts who for several years have anticipated a sustained slowdown in economic growth that hasn't occurred. And data released this week point to a strong finish for this year as well.

The Commerce Department reported Wednesday that another surge in purchases of new vehicles drove consumer spending up by 0.5% last month, following an even larger 0.7% rise in September.

Meanwhile, both the University of Michigan and the Conference Board in New York said their monthly surveys of consumer attitudes, which had been sagging along with the stock market, rebounded--along with the market--this month.

Meanwhile, home resales nationwide climbed 2.1% in October to a seasonally adjusted annual rate of 4.79 million--the highest since July's record 4.91 million sales--led by a rebound in the South, according to the National Assn. of Realtors. Low mortgage rates helped fuel the advance.

All that spending, though, cut into Americans' bank accounts. In October, for the second month in a row, the rise in consumer spending exceeded the increase in after-tax personal income. That meant consumers had to borrow or dip into their savings to pay their bills, said James Glassman of Chase Securities in New York.

"I can understand why people feel little need to save when their net worth is going up because of the stock market, but I don't know how far that will go," Glassman said. "To go beyond this point, you have to think that people are going to cash out some of their market gains, or go on a borrowing binge. I can't rule that out, but it's not the most likely outcome."

Far more likely, in Glassman's view, is that consumers will increase their spending no faster than their disposable incomes rise, or perhaps even less than that if they decide they want to begin to save part of their current after-tax income.

Since consumer spending accounts for roughly two-thirds of gross domestic product, even a small pullback by consumers would put a lid on 1999's growth. Glassman thinks that will happen and, with an increasing drag from trade and flat or falling business investment, growth will be very slow in the first half of the coming year but "moving up in the second half."

But in the meantime, the combination of a strong beginning for consumer spending for the fourth quarter, the higher stock market and renewed levels of confidence caused many forecasters to predict that economic growth in the final three months of the year will come in at a 3.5% or 4% annual rate. That would be close to the 3.9% increase in the inflation-adjusted GDP in the third quarter.

Such rosy numbers are being recorded despite worsening conditions in the manufacturing sector, hard hit by falling demand for U.S. exports because of the Asian financial crisis.

Manufacturing woes deepened after the Russian government defaulted on part of its debt in August, causing severe strains in world financial markets.

Those strains, which have eased significantly but not gone away, caused many forecasters to worry that the U.S. economy might slip into recession next year, rather than just confront a period of much slower growth.

But the latest round of economic statistics--and three quarter-percentage point cuts in short-term interest rates by the Federal Reserve Board since the end of September--have sent some forecasters back to their computers for a new round of number-crunching, with generally positive results.

Kathleen Camilli, chief economist for Tucker, Anthony & Co. in New York, was among those revising her forecast.

"I had been in the camp of economists who thought that growth next year would be 1%," Camilli said. The risk of a recession has receded, in her estimation, and she has raised her forecast for 1999 growth to 2.5% to 3%.

For the short run, Camilli also has boosted her estimate for fourth-quarter GDP to a 4% rate, a gain that would mean that growth since the end of last year would reach 3.8%--and match the economy's stellar performance in 1996 and 1997.

Much uncertainty remains about next year, particularly about world markets. Camilli's forecast assumes that various Asian economies don't take another nose dive and that Japan in particular begins a recovery.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Personal Income

Seasonally adjusted annual rate, in trillions of dollars; October: $7.2 trillion.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Personal Spending

Seasonally adjusted annual rate, in trillions of dollars; October: $5.9 trillion.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Existing-Home Sales

Seasonally adjusted annual rate, in millions of units; October: $4.79 million.

Advertisement
Los Angeles Times Articles
|
|
|