Consumers still holding back, despite rebound

By William Sluis
Chicago Tribune

In an economy that is heavily dependent on spending, any drag on consumers' attitudes is bound to create concern.

Despite a general rebound in economic activity, the mood of Americans remains well below levels that would normally be expected at this stage of a recovery. However, dour faces or not, buyers continue to flock to stores and auto dealer showrooms.

That brings us to tomorrow's report of May consumer confidence. Economist Lynn Reaser expects it to show slight slippage, to a reading of about 92 from 92.9 a month earlier.

"Consumers continue to display mixed emotions. Their attitudes are held in check by sky-high energy prices and concerns about the geopolitical situation, dilemmas that are in fact related," said Reaser, of Banc of America Capital Markets in St. Louis.

Although energy costs make up only about 7 percent of a typical household's budget, she said, seeing gasoline selling for more than $2 a gallon weighs on optimism.

On the bright side, Reaser says, "the job market is starting to look more favorable. Layoffs are subsiding, the jobless rate has steadied, and manufacturers are hiring for the first time in nearly four years."

Economic momentum has been building for months, given a boost by the lowest interest rates in 45 years. Last week, in an apparent thank you, President Bush nominated Federal Reserve Chairman Alan Greenspan for another term.

Chicago economist Robert Dederick expects Thursday's revision of first-quarter gross domestic product to show a mild uptick from the 4.2 percent growth rate reported a month ago. "The basic message is that the economy is on a roll," said Dederick, of RGD Economics. "All that juice applied by the Fed, as well as the effects of the federal budget deficit, are having an effect."

Trade is acting as a negative factor on GDP, Dederick said, noting that "foreign demand for American goods is quite vigorous, but imports continue to pour in."

In the second quarter, he sees the economy revving up further, to nearly a 5 percent growth rate, and "there is every indication the economy will continue to expand vigorously, at least through the remainder of this year."

Members of the Fed won't meet to discuss monetary policy for another five weeks. There are growing expectations they will boost the short-term interest rate target on June 30 from its current 1 percent level. In the interim, policy-makers will be closely monitoring economic indicators.

Up tomorrow and Wednesday, respectively, are reports on April existing-home sales and new-home sales. Based on comments by builders and real estate agents, a rapid rise in mortgage rates, to about 6.3 percent for a basic 30-year loan, hasn't yet produced a slowdown.

Also in sight: reports on April orders for durable goods on Wednesday, and on the month's personal income and spending on Friday.

With the stock market in a holding pattern following a peak in February, doomsayers are looking for Wall Street to stumble further.

But Flossmoor investment manager Richard Evans says that the sky is not falling and that technical indicators remain bullish.