NEW YORK (AP) -- The fate of the American economy over the next few months rests with the consumer, the same average individual who thinks such power resides only with higher ups in Washington.
It is easy to see why such a notion is widespread. Those same high officials, including the president over the past eight years, have done little to discourage such thinking. Even taking credit at times.
But Alan Greenspan has now clarified things.
Greenspan, the Federal Reserve chairman and thus the most powerful monetary figure in America, conceded last week that how the consumer behaves will determine if the economy slips into recession or avoids it.
For the second time in a month the Federal Reserve cut short-term interest rates by one-half point, a major element in its motivation being to spur consumers into more activity.
Whether or not consumers respond is now a critical element in the entire economic chain, from gathering and distributing raw materials to the production of finished goods and their retailing.
Based on recent confidence surveys, consumers are losing their nerve, pulling back from acquiring items that earlier they wouldn't have hesitated to buy, even if they had to borrow money.
By lowering interest rates, the Fed hopes to spur business and consumer activity, not simply by making it easier to borrow and spend, but to nourish the idea that it's the right thing to do.
The Fed has credentials in this area, since its six interest-rate increases in 1999 and 2000 had much to do with deflating high consumer expectations. If it can dispirit consumers, can't it inspire them too?
The question cannot be answered now. While conventional thinking assumes consumers will respond quickly to the incentives, there is no certainty about it. Consumers aren't automatons.
Unlike in earlier recessions, when the savings rate was probably at 4 percent or 5 percent, savings today are near zero, at least as measured by the official rate. Consumers may want to build a cushion.
It is pointed out repeatedly by those who see little fear in an official zero savings rate that the calculations fail to include capital gains, which if included might raise the savings rate considerably.
Their argument is bolstered by statistics showing that in just the past decade the number of shareholders has multiplied to the extent that most households have portfolios, if only through retirement plans.
That money, however, is not as available as cash in an old-fashioned savings account. Much of it cannot be tapped without incurring penalties. And, as today, market conditions may leave only meager or no capital gains at all.
The question then is how much of an incentive must the consumer have to offset what surveys show are depressed expectations?
It isn't even clear if the surveys reflect the true consumer mood. Money is still going into stocks and houses are still being bought. And the jobless rate remains very low. Maybe the consumer mood isn't as low as suggested.
But if it is at the depths, and if it continues to be reflected in consumer inactivity, then the Federal Reserve has made clear that it is ready to raise the incentives by lowering rates.
End advance for release Sunday, Feb. 4.
© 2016. All Rights Reserved. | Contact Us