By Claes Fornell
Despite a flurry of good economic news, the U.S. recovery, while better than just about any other country at the moment, will not gain much momentum unless there is a substantial increase in consumer demand.
Following the February jobs report, which showed better-than-expected employment growth, many economic commentators contend the economy is poised for sizable expansion in the near future, perhaps by as much as 4% or better.
The stock market seems to agree. Share prices fell on the news, fearing an increase in interest rates.
But neither is likely unless consumer spending strengthens substantially. In fact, spending growth probably needs to double in order for the economy to take off.
This is what the numbers indicate: Last year, consumer spending increased by 2.5% and GDP grew by 2.3%. In the late ’90s, when the economy last grew by 4%, consumer spending increased by more than 5% per year.
Since consumers represent about 70% of GDP, the arithmetic is straightforward: The economy cannot expand much without more consumer demand. Retail sales actually dropped in December and barely moved in January.
Why is consumer demand in short supply? The recession ended a long time ago. There are two main reasons: continued meager wage growth and a decline in buyer satisfaction.