Why Rising Consumer Spending Isn't Likely to Last

Consumer spendingSome Americans must be feeling pretty fat and happy these days. The International Council of Shopping Centers estimates that retail sales jumped by 8% to 10% in March compared to last year, and a Thomson Reuters poll of analysts suggests March sales were 6% higher than last year. And even sales of luxury goods -- one of the lowest-priority purchases during a recession -- were up 23% in March.

The real question, though, is: Where is the cash coming from? When the recession first showed its ugliness in 2008, economists were pessimistic about a near-term recovery. That's because consumer spending has been key to economic growth, but thanks to the housing crisis, few Americans were in a position to spend their way out of this slump. Many were mired in debt on underwater houses, unemployed and had little in savings.

Now, nearly two years later, consumers are showing remarkable interest in spending money again. The retail numbers are up, and according to one recent survey, increasing numbers of consumers are paying their credit card bills on time. (Housing payments, according to the report, are a different story.)

Less Saving, More Credit

Still, it's not clear that Americans are in a better position to spend. The unemployment rate is hovering around 9.7%, and nobody -- including Treasury Secretary Timothy Geithner -- seems to think it will return to pre-crisis levels for a long time. Home prices are still in the toilet, foreclosures keep rising and personal income was basically flat in February.

It seems as if consumers are dipping into their savings and extending their credit to pay for their spring shopping sprees. The personal savings rate in February was roughly 3%, according to the Bureau of Economic Analysis. That's down from its 5% recession-era peak in 2009. And at the same time that the savings rate is sagging, economists think consumers borrowed more on their credit cards in February, after a long string of declines in credit card borrowing. (By the Associated Press' count, borrowing levels rose in January for the first time in 11 months.)

Although the tendency is to point to increased consumer spending as a sign that the economy is recovering and that all is right with the world, shouldn't the evidence that spending is fueled by credit and diminishing savings be a matter of some concern? It is to some economists.

Up Next: A Sharp Drop?

"The question is . . . whether this stronger showing from households is a flash in the pan or something more sustainable? Our long-held view is that the recovery will fizzle out later this year," wrote Paul Ashworth, an economist at research firm Capitol Economics. "The latest consumer confidence data suggest that the growth rate of personal spending will drop back sharply."

Some words of advice to those consumers still riding the credit card gravy train: Enjoy it while it lasts.
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