The outlook for consumer spending in the US is improving due to the 200 basis point interest rate cu...
The outlook for consumer spending in the US is improving due to the 200 basis point interest rate cuts so far this year, according to Ken Forman, head of global strategy at Standard Life Investments.
Forman says the unexpected rate cut in March was a signal to the markets that the US is not heading into a recession and as such the group's global portfolios are overweighting the region.
He says consumer spending should improve by the end of the year as the markets strengthen by the end of the third quarter.
At present, he says consumer spending in the US is still growing although it has slowed dramatically from the pace it was moving at last year.
He says: "In the middle of last year, consumer spending was growing at about 8%, which compares to about 1 or 2% this year."
Forman explained that this is a delayed reaction to the fact that interest rates were rising in the US from mid 1999 to the beginning of this year.
A second factor, he says, is that oil prices have been high. He says this has led to increasing utility bills, particularly for those areas which rely on gas.
Forman says: "Over the winter, heating costs went through the roof for those households that relied on gas, in particular.
"This has meant these households have had less money available for spending on other things."
Thirdly, Forman says the Nasdaq's slump over the past 12 months has knocked the confidence of consumers.
He says when the stockmarket was booming, people in the US were spending more than they had been previously, and that this trend is now in reverse.
Although he is broadly positive on the likelihood of a recovery in consumer spending, highlighting the fact that the housing market has already picked up as a result of the fall in interest rates, Forman says this might be delayed as the US labour market is presently weak.
Forman says: "There were net job losses in March and April and we expect more in the coming months as companies are still facing uncertainties about their futures."
Matthew Wickens, a global economist at ABN Amro, is more negative on the subject of consumer spending in the US.
He says the negative saving rate in the US is a sign that households there have overspent, and that a period of deep retrenchment is now necessary.
Wickens says the headline National Income and Product Accounts measure of the personal saving rate is -0.8%, its lowest since the 1930s depression.
Wickens says the anticipated retrenchment in consumer spending would involve pushing the saving rate firmly back into positive territory.
He says: "This retrenchment would, of course, come at the expense of consumer spending, and would deliver a massive negative hit to an already weak economy."
However, Wickens adds that the fall in the saving rate in the US has been quite rational a result of a strong rise in net worth after the rise in equities in the 1990s.
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