Diane Swonk, Chief Economist
Mar. 1, 2010 – 10:15 a.m. CT
Consumers Tap Savings to Spend, Manufacturing Activity Moderates, Construction Drops and Fed Loses Valuable Player
Consumers tapped into their savings in January, keeping spending on an upswing in the face of persistently weak income growth. This should not be a surprise given the pent-up demand (and need to repair and replace worn and damaged goods) created during the recession. Indeed, a temporary drop in the saving rate in 2010 is a necessary precursor to building a more self-feeding recovery down the road. Consumers have little choice but to tap into their savings when their incomes are still constrained and credit remains tight. The saving rate, however, is expected to resume an upward trend in 2011 and 2012, as consumers are forced to come to grips with the debt owed to ourselves and the rest of the world.
Separately, manufacturing activity continued to expand, albeit at a slower pace in February than in January. New orders and production moderated, while employment continued to improve - the index posted its third consecutive month of improvement in employment. We have finally cut so far down that there is nowhere to go but up for manufacturing employment. Moreover, heavy winter snows accounted for a portion of the slowdown in new orders and production, which are likely to be recouped in March.
On the downside, construction activity plummeted in the month of January, with declines in residential construction exacerbating declines in commercial construction.
Finally, Don Kohn, who is currently vice chairman of the Fed, has announced that he will be retiring when his term is up in June. Frankly, we were lucky to have him serve as long as he did. He has grandchildren whom he and his wife would like to enjoy, and he has more than served his country. Congrats Don!
The Bottom Line: The recovery continues, but remains extremely uneven and fragile. The Fed is right to stay on the sidelines, and will remain there for some time to come. Risks of a double-dip recession remain uncomfortably high - in the 10-20 percent range.
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