Fortune: Increasing Consumer Spending May Be an Illusion

Tuesday, 02 Jul 2013 09:05 AM

By Michael Kling

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Rising consumer spending may be encouraging Federal Reserve officials to wind down their stimulus efforts.

For instance, Fed Governor Jeremy Stein has cited consumer spending as a reason for optimism in the economy.

"Consumers generally seem to be showing some signs of strength," Stein said after a speech last week.

Editor's Note: Startling Proof of the End of America’s Middle Class. Details in the Video

Yet increasing consumer spending may be an illusion.

Although consumer spending increased, the bulk of additional spending was on big-ticket items such as autos and home improvement, writes Fortune senior editor Stephen Gandel.

In reality, average consumers are not financially better off and are not spending more, economist Dean Baker, co-director of the Center for Economic and Policy Research, tells Gandel.

Companies paid special dividends at the end of last year to avoid higher 2013 taxes, and the stock market is up this year. Both of those factors primarily benefit the wealthy and explain the greater spending on big-ticket items, Baker says.

As the memory of the special dividends fades and the stock market flags, spending by the wealthy might falter.

Consumer spending has been flat across all income groups, according to Dennis Jacobe, chief economist for Gallup.

Americans' self-reported daily spending averaged $90 in June, unchanged from May and not much different from March's $89, he writes in a Gallup blog. Upper-income spending averaged $143 last month, not much different from the $150 in May and essentially the same as April's $140.

Spending has not weakened despite the end of the payroll tax cut and federal budget cuts. Stock market gains, increased optimism about housing and refinance benefits from low mortgage rates may have helped support spending.

"The lack of increased consumer spending is somewhat disappointing given Americans' relatively high level of economic confidence in May and June," Jacobe says.

"However, it is hard for spending to increase without real job growth. Further, as this disconnect illustrates, economic confidence is often a necessary but not sufficient reason for consumer spending to increase.

Consumers will face additional headwinds of higher interest rates that will pose disadvantages to consumers buying autos and houses and are likely to end the benefits of mortgage refinancing, Jacobe cautions.

"It remains to be seen whether American consumers will continue to show high levels of economic confidence given the higher interest rate levels. But even if they do, it is not clear if the result will be the much needed increase in consumer spending."

Editor's Note: Startling Proof of the End of America’s Middle Class. Details in the Video

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