Consumer Spending Is Back: Good News, Right?

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In 2010, consumer spending in the U.S.--which accounts for 70 percent of the country's economic activity--grew at its fastest clip since the pre-recession days of 2007, closing out the year with six straight months of growth. Consumers spent 3.5 percent more than they did in 2009, according to the Commerce Department. The report follows news that the U.S. economy grew at a 3.2 percent annual rate in the fourth quarter.

But while the numbers appear promising at first blush, troubling questions lurk behind them: Are consumers really growing more confident, or are they simply resuming their profligate spending as the recession recedes? Will Americans continue to spend at current levels, or will they retreat once the discounts they enjoyed during the holiday season disappear?

  • We May Be Back to Our Free-Spending Ways, asserts The Atlantic's Daniel Indiviglio. The data indicates that spending growth has outpaced income growth, which means people aren't saving as much, he points out. This might be good news if people are increasingly confident about their economic situations, Indiviglio notes. But the numbers could also signify that "consumers are back to their old spend, spend, spend and save very little frame of mind, now that the economy's worst problems appear behind us."
  • No, We're Not, counters a Moody's analysis excerpted by Benzinga. The credit-rating agency argues that the savings rate--which is currently at 5.3 percent--"remains very high by prerecession standards."
  • Lower Savings Rate Good for Now, claims Dirk van Dijk at Zacks Investment Research. In the short run, he says, "a falling savings rate increases economic growth ... If someone gets a raise, but does not spend more, then that raise does not stimulate other economic activity." But over the long run, the country needs a high savings rate so it doesn't have to borrow from abroad to invest in the economy.
  • 2011 Looks Promising, suggests Stephen Stanley of Pierpont Securities, according to the BBC. He predicts that increased hiring will boost incomes, which will allow Americans to both spend and save more.  
  • I'm Not So Sure, says Michelle Meyer of Bank of America Merrill Lynch, as quoted by Reuters. She predicts that consumer spending will slow down in the beginning of 2011, and argues that spending growth at the end of 2010 had more to do with retailers offering discounts than with an improving job market.
  • I Wouldn't Celebrate Yet, contends Angela Moore at MarketWatch. Retailers offered promotions to entice consumers to spend more, Moore says, and those discounts will eat into their profit margins. Meanwhile, she adds, "the job market remains extremely gloomy" and "prices have been climbing for such necessities as gasoline, heating oil and food. And we should expect to pay more for discretionary items like clothing, as manufacturers have been warning about their own rising costs."

This article is from the archive of our partner The Wire.