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FDIC 2005 Economic Outlook
The U.S. Consumer: Hero or Has-Been?
Three experts weighed in on consumers and their future role in the economy at a November 4 economic roundtable sponsored by the FDIC Division of Insurance and Research (DIR).
FDIC Chief Economist Rich Brown, the conference moderator, asked panelists to consider whether wages and income can grow fast enough to propel consumer spending, whether homeowners can continue to borrow against their homes at todays high levels and how home price trends might affect consumer spending.
Carl Steidtmann, Chief Economist for Deloitte Research, looked at several economic indicators that affect consumer spending. While oil prices have a particular effect on middle- and lower-income households, when adjusted for inflation and productivity, the actual price of oil is relatively low, Steidtmann said. It would take a substantially high oil price to get the kind of shock experienced in the 1970s. The impact of oil prices is overstated, Steidtmann said, and should not worry us seriously. A real cause of worry is real hourly wages, which tend to be a leading indicator of real consumer spending.
As for home prices, Steidtmann said he does not think the nation as a whole is in a housing bubble. The demographics behind the home market are very strong, he said. The children of the baby boom generation are coming into the housing market, providing liquidity. Theyre buying at the lower end, which allows everyone else to move up. There are also strong increases in homeownership among minorities, he said, and the baby boom generation has started to purchase second homes.
Overall, Steidtmann said, the economy is doing well, the household sector has a lot of cash flow and the housing market remains strong. He predicted a good consumer spending environment in 2005.
Allen Grommet, Senior Economist, Cambridge Consumer Credit Index, said consumers have been fueling the economic recovery and continue to help even as businesses play a larger role. Recent economic growth has been boosted by strong increases in productivity, but the unemployment rate, which hit a peak of 6.3 percent during the recession, has been slow to come down to pre-recession levels. Normally, Grommet said, the jobs lost during a recession would have been recovered within two years of the recoverys outset, but that has not occurred this time. Were three years into it and still havent recovered the jobs, he said.
Grommet expressed some concerns about the effect of rising interest rates. Most forecasts predict that the Federal funds rate will be between 3 and 3.5 percent at the end of 2005.
Consumer confidence, as measured by the University of Michigan survey, was between 105 and 100 in the late 1990s, but has moved to the mid-90s in this decade. While consumer confidence was measured at 91.7 in the fall of 2004, Grommet said that all indicators show a rise in confidence levels in subsequent months. The good side is that consumers are hanging in there, he said. Confidence levels are staying up, even though consumer confidence is not real robust.
Consumers continue to use credit, and the use of credit by lower-income consumers has been growing. However, there is often a disparity in attitudes between higher-income and lower-income consumers: more use by higher-income consumers usually indicates consumer confidence, while increased use by lower-income people often indicates that things are going badly.
Credit card delinquencies are back to average levels after their highs from 1997 to 2002, Grommet said. On average, he added, consumers are doing fine, although he is concerned that lower-income consumers could experience difficulties.
Leonard Burmen, Co-Director of the Urban-Brookings Tax Policy Center, focused on the implications of tax policy for consumers. Running fiscal deficits at about three percent of Gross Domestic Product (GDP) would not be a problem if the baby boomers were just beginning their careers, Burman said, but because they are nearing retirement, the demands they will make on the budget will be immense. By 2050, Medicare and Social Security will equal about 18 percent of GDP, he said. Over the long run, unless you deal with these problems, they clearly will have a negative effect on the economy, he said.
Luncheon speaker Donna Gambrell, Deputy Director, Division of Supervision and Consumer Protection (DSC), focused on the need for financial education to inform consumers. Nearly 10 percent of U.S. families do not have transaction accounts, and more than 12 percent do not have checking accounts, Gambrell said. Twenty-eight percent of students with a credit card roll over debt each month. Consumers 45 and older often lack knowledge of basic financial and investment terms.
Faced with a wider and increasingly complicated array of options, consumers are more vulnerable to errors and threats such as predatory lending. Consumers are increasingly responsible for their own retirement savings, Gambrell said. The personal savings rate has fallen dramatically to around two percent in recent years. Household debt as a percentage of income is at record levels.
Consumers need to understand their financial choices, make informed judgments and spend wisely for the future, Gambrell said. Through its Money Smart Program and other efforts, the FDIC is striving to reach out to consumers, especially those who do not have bank accounts, live from paycheck to paycheck and often turn to high-cost lenders such as pawn shops, check cashers and wire transfer companies. The FDIC is also working with the Department of Education and the Administration on Aging to develop new efforts to reach consumers.
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