Economic indicators show a "soft" but resilient economy
According to the latest economic indicators, the US economy is holding steady but also hitting a soft patch as evidenced by lower consumer spending in the month of April. This news in conjunction with the fact that inflation has halted to just 0.7 percent over the past year seems to indicate that the Fed will not start curtailing the buying of bonds as originally proposed by Chairman Bernanke. The Fed is currently purchasing 85 billion dollars’ worth of bonds per month.
The senior economist at TD securities, Millan Mulraine told Reuters that, “Any enthusiasm to slow the pace of bond purchases before the end of the summer will likely be tempered at the margin, particularly given the benign inflationary backdrop." Michael Schumacher concurred in this assessment by predicting that,”…if inflation readings remain very low it's going to make him want to keep on purchasing at the current pace."
Despite the soft spending data, many economists believe the economy is “holding its own” despite the sequestration news out of Washington. Indeed consumer sentiment actually rose from 76.4 percent in April to 84.5 percent in May according to the Thomson Reuters/University of Michigan index on consumer sentiment. Much of this is growth is driven by rising house prices as well as growing employment opportunities.
The manufacturing sector also seems to show signs of a rebound as indicated by the Institute for Supply Management-Chicago business barometer. The Midwest regional economy went from 49 points in April to 58.7points in May. Any reading above 50 points indicates an expansion in the regional economy. The chief economist at RDQ, John Ryding explained that, “The rebound in order growth, employment growth, order backlogs and production, while continuing to liquidate inventory at a rapid pace, suggests that manufacturing conditions improved significantly in the month."
Many economists speculate that a major factor in how well the economy continues to grow and gain momentum lies with consumer spending. While there is a lot of positive data in this area, there are also plenty of areas for concern. Chief among them is the fact that wages have remained stagnant and the savings rate remains at 2.5 percent. Chief economist of Bank of the West, Scott Anderson said that, “A low 2.5 percent personal savings rate gives the consumer little cushion to sustain spending in the face of unexpected adverse shocks.”
Perhaps Ryan Sweet of Moody’s Analytics summed up the current situation best, "Real spending is soft, but enough to help carry the economy forward. We need the consumer to continue spending because there are not many legs to stand on."