Consumer spending is up?

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Consumer spending is up?

Post by Boutcher on Sun May 22, 2011 9:22 pm

Consumer spending makes up 71% of the United States GDP. The most recent statistics show that consumer spending is up 5.2% year over year which implies a growing economy. However, the numbers suggest that U.S. consumers bought 16% more gasoline than last year, but in reality the increase in spending for gasoline was all related to price. The same goes for food. If you take out food and gas from retail sales, consumer spending would be flat. There were actual spending declines on furniture, music, electronic games, online sales and other categories. FedEx even warned that their earnings would be down due to less shipments and higher energy costs. And retailers are expecting a modest Christmas season. These signs all points to a slowing economy. And the job layoffs continue rolling on.

Is the economy slowing so the Fed will further cut rates, or is inflation rising which will force the Fed to start raising rates? The Fed has to be careful when deciding what to do with interest rates because if they cut too far they will cause runaway inflation and if they don’t cut they could slow down the economy. However, the real problem is that if we get stagflation, a combination of a slowing economy and rising inflation, the Fed would have a hard time fixing this situation. They couldn’t cut rates or increase rates. This is what I predict will happen.

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