U.S. consumers appeared to have resumed their free spending habits. Surprised analysts expected flat to negative consumer spending growth in August. However, the figures released by the United States Commerce Department reveal that the consumer spent far more than analysts expected. The department reported that consumer spending actually increased .04 percent which suggests a 4.8 annual rate of growth. To the casual observer this would suggest that some hint of inflation might be present in the economy at the consumer level. But at the Federal Reserve, they choose to use a different measure of inflation, one that excludes food and energy. This index rose a mere .01 percent for the fourth straight month, suggesting a much more modest 1.2 percent annual rate. So as long as you do not consume food or energy, no price hikes will be apparent. If however you are responsible for food and shelter you will notice prices at the supermarket and at the gas pump rising at a much higher rate than .01 percent The next component of the current stagnant economy to turn will be the velocity side of the inflation equation.
For the past three quarters the Federal Reserve has been increasing the overall quantity of the money supply. This is evidenced by the Federal Reserve Bank of New York’s balance sheet which reflects the nearly $1.6 trillion added to the books. However, the nation’s consumers have been saving their money and curbing their spending. These actions slow down the velocity of money or the speed with which money moves through the economy. This reduced activity exerts deflationary pressure on the overall market. If consumers earn a dollar and then immediately save it, this action has the effect of slowing the growth intended by the Feds action. Spending money faster increases its velocity thereby fueling growth and inflation. However, evidence of increased consumer spending can be found at MasterCard Inc., the world’s second largest payments system. The firm posted a 31 percent increase in second-quarter profit that exceeded nearly all Wall Street estimates. The increased earnings can be attributed to more consumers who are spending money on the electronic level. While it is true that we are rushing headlong into a cashless society, it would be inaccurate to assume that this increase is due to more electronic transactions replacing cash. The fact is that 95 percent of everything we call money is already an electronic impulse. Furthermore, with less than 5 percent remaining in cash form, this replacement does not support a 31 percent increase in volume. Such a dramatic increase can only be explained by increased consumer activity.
MasterCard and Visa combined handled roughly $2.5 trillion, or 82 percent, of all U.S. consumer spending on their general purpose cards last year, according to the Nilson Report, an industry newsletter.
Cards and electronic payments account for more than half of U.S. consumer purchases this year, compared with just 36 percent in 2003. On the whole, U.S. consumers are spending slightly more as their incomes are rising modestly. At least this is what the official data showed Monday. As optimistic as this might seem, the report is doing very little to dispel fears about the health and well being of the economy. The Commerce Department said consumer spending rose by 0.4 percent in July and that the broad measure of incomes rose 0.2 percent. When combined with August’s reports, these figures suggest that consumers may be at last spending again. Most economists that were polled had expected consumer spending to increase 0.3 percent and personal income to increase 0.2 percent. The latest increase in spending was the largest of 5 reported since March and the outlook is for continued slow steady growth. This all important spending component is fairly critical to the continued hope of a general economic recovery. Consumer spending accounts for over half of our nations gross output. The total figure increased by $23.3 billion.