That Sinking Feeling
Subject Consumer Spending
Topic Supply and Demand
Key Words Retail Sales, Recession, Unemployment, Interest Rates
News Story

The bad news just keeps coming. Retail sales figures for February provided further evidence of a weakening economy and decline in consumer confidence. Retail sales fell 0.2 percent in February, the third decline in the last five months. The weakness in retail sales could provide added reason for the Federal Reserve to cut interest rates again.

Retail sales data for February were markedly different from January data when merchant discounts spurred consumer spending. Contributing to the decline in February retail sales was a decreased consumer demand for home furnishings and household appliances that was likely the result of a decline in the housing market. Although retail sales declined for the month of February, for the year retail sales rose 2.7 percent, the lowest rate of growth since May 1997.

The February retail sales figures support the belief that consumers are becoming increasingly cautious about their spending. This is consistent with results from surveys of consumer confidence. Consumer confidence data for February were the lowest level in almost 5 years.

Another factor responsible for reduced consumer purchases is the decline in stock market prices. Falling stock prices have lowered the net worth of U.S. households by 2 percent, the first decline in almost 55 years. Problems in the corporate sector will not reverse this decline soon. Corporations continue to revise earnings estimates downward and announcements of layoffs are becoming much more frequent.

Consumers have continued to borrow heavily. To finance their January spending spree, consumer credit expanded at a 12.5 percent annual rates - nearly double the December figure. The increased debt, analysts argue, will eventually cause consumers to curtail spending. The impact of decreased consumer spending would be to depress economic activity still further.

(Updated April 1, 2001)

1. Consumer purchases account for what percent of gross domestic product? What percent of gross domestic product are wages and salaries? Why are analysts concerned when consumer purchases decrease? Why are they concerned when layoffs increase?
2. Consumers apparently went on a shopping spree in January. According to the article, many of these purchases were financed by consumer credit. According to some analysts, what impacts might this spending have on the economy in coming months?
3. Analysts have noted that the decline in retail sales might provide support for the Federal Reserve in terms of their deliberations about the course of interest rates. How would the decline in retail sales support a Fed decision to cut interest rates? Why would the Fed want to cut interest rates?
Source Leslie Earnest, "Retail Sales Fell 0.2% as Confidence Slips," The Los Angeles Times, March 14, 2001.

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