U.S. consumer spending, long a mainstay of the economy, slid unexpectedly in January as shoppers took home fewer long-lasting durable goods, the government said on Monday.  The Commerce Department said consumer spending dipped 0.1 percent, its first drop since September of last year, after a gain of 1.0 percent in December. Personal incomes in January rose by 0.3 percent. 

Within the Commerce Department report, spending on durable goods — items meant to last a minimum of three years — fell 5.7 percent, their biggest decline since a 6.0 percent drop in February 1990. In December, spending on durable goods zoomed up 6.8 percent, aided by financial incentives for auto sales.  Spending on services rose 0.4 percent, up from a 0.1 percent gain seen in December, while purchases of non-durable goods rose 1.3 percent, compared with a 0.4 percent increase seen in the previous month.

Consumers appeared to use their pause in spending as an opportunity to build up their savings. The saving rate, the percentage of disposable income left over after expenses, rose to 4.3 percent in January from 3.9 percent. In 2002, personal saving stood at 3.9 percent, its highest annual level since 1998.

Wednesday we got the beige book. “The beige book is here, the beige book is here!”  It basically said that the U.S. economy remained weak in the first months of 2003, dampened by uncertainty over the economic outlook and possible war with Iraq.  “Reports from the 12 Federal Reserve Districts generally suggested that growth in economic activity remained subdued in January and February,” the Fed said.  (Duh, I could have told them that. 😉  They also said that consumer spending was generally weak. Some areas noted small improvements, offset by deterioration in other regions.  Also, business spending also remained weak. Worries about the future hurt hiring and spending plans, and capital expenditures remained sluggish, the Fed said.

On Friday, the Labor Department said payrolls outside the farm sector plunged 308,000 in February — the biggest decline since a 327,000 drop in November 2001.  The data sent the U.S. dollar spiraling to four-year lows against the euro.  Some have said that the slide in payrolls may be due to the callup of U.S. military reserves and the harsh northeast winter.  Also, the unemployment rate rose to 5.8 percent in February from 5.7 percent in January.

Well, the good news is that our stock market isn’t in the same shape as Japan’s.  Japanese stocks fell to fresh 20-year lows on Monday.  Even if you think our stocks are overpriced currently, a 20 year low would put us back to 1983 levels.  So imagine the Dow at 1000 and the S&P at 150.  Now that would be an economic problem!

Bad news was reveled in the consumer confidence numbers that came out a week or so ago.  Consumer confidence sank to the lowest level in nearly a decade. Many feel that it’s only a matter of time before the gloom translates into a drop in spending.  The Conference Board, a private business research group, said confidence fell for the third month in a row.

Also a series of downbeat U.S. economic data reflecting higher-than-expected wholesale inflation, a record U.S. trade deficit, and higher weekly jobless claims played with the market.  Additionally, a report from the Federal Reserve Bank of Philadelphia reported a steeper-than-expected drop in business conditions. The report pointed to a sharp manufacturing slowdown in the mid-Atlantic region, and dampened prospects for a rebound at factories nationwide. It said its index of business conditions fell to 2.3 in February, from 11.2 in January, though it still pointed to an expanding regional manufacturing sector. (a reading above zero indicates growth)

In other economic news, the government said the U.S. trade deficit unexpectedly jumped 10.6 percent in December to a record $44.2 billion. The gap, due to rising imports and falling exports, far exceeded the $38.80 billion estimate. A second report showed prices paid to U.S. producers in January soared at their fastest pace in more than a decade, pushed up in part by rising energy costs and showing more evidence of inflation in the economy than expected.

All of this amounts to considerable concerns about the economy.  But are they really justified?  If we compare to the first Gulf War, we find we are in pretty good shape.  Inflation is about 4.0 percentage points lower than in 1990. The jobless rate in December 1990 was 6.4 percent, versus 5.7 percent in January 2003. Thirty-year mortgage rates are below 6.0 percent now, compared with 9.7 percent in late 1990.  Not to mention the stock market is still significantly above the 1990 levels.

So is it possible that our expectations have changed for what we consider a good economy?  Do we need to see the stock market rise to all time highs before we feel the economy is really clicking?  Or maybe more importantly, do you ever really know how good you have it until you lose it?

A man walking along a road in the countryside comes across a shepherd and a huge flock of sheep. Tells the shepherd, “I will bet you $100 against one of your sheep that I can tell you the exact number in this flock.” The shepherd thinks it over; it’s a big flock so he takes the bet. “973,” says the man. The shepherd is astonished, because that is exactly right. Says “OK, I’m a man of my word, take an animal.” Man picks one up and begins to walk away.

“Wait,” cries the shepherd, “Let me have a chance to get even. Double or nothing that I can guess your exact occupation.” Man says sure. “You are an economist for a government think tank,” says the shepherd. “Amazing!” responds the man, “You are exactly right! But tell me, how did you deduce that?”

“Well,” says the shepherd, “put down my dog and I will tell you.”