Consumer Spending, Not Stimulus, Made Economy Better in First Quarter

By Matt Cover | May 29, 2009 | 8:33 PM EDT

Appliances are seen on display at Costco in Mountain View, Calif., Wednesday, May 27, 2009. The Commerce Department reported Thursday that orders for durable goods rose by 1.9 percent in April, more than four times the 0.4 percent increase that had been expected. (AP Photo/Paul Sakuma)

( - The economy did better than expected in the first quarter of 2009, driven almost entirely by an unexpected upswing in consumer spending, according to new data released by the Commerce Department’s Bureau of Economic Analysis (BEA).
These numbers indicate that the recession may have bottomed out even before much of the federal stimulus money is spent, according to analyst Bill Beach.
The economy still shrank last quarter by 5.7 percent as investment, housing, exports, and manufacturing all declined. However, the government had originally forecast a 6.1 percent drop in GDP for the first quarter.
Consumer spending accounted for the better-than-expected outlook – actually increasing 1.08 percent in the first quarter – after falling 2.99 percent in the fourth quarter of 2008.
Every other major sector, including government consumption and investment, fell in the first quarter, according to the BEA. The revised figures reflect recently available data that showed more inventory investment and exports.
The better-than-expected numbers may be a sign that the recession is beginning to bottom out, according to Beach, director of the Heritage Foundation’s Center for Data Analysis, who told that the increased consumer spending – focused on auto purchases – and a reduction in business inventories, showed the economy was beginning to right itself.
“We’re beginning to see some signs, but they’re not all pointing in the same direction,” he said. “My sense is that we are approaching bottom, assuming no public sector policy mistakes are made, that the economy is beginning to go through that self-correcting process.”
Beach explained that the reason consumer spending went up and business inventories went down was because savvy entrepreneurs and business managers were finding clever ways to entice wary Americans to buy their overstocked products, something that the economy does naturally at the end of a recession.
“Consumer spending is turning up because the normal processes of correction are manifesting,” Beach said. “Consumers don’t automatically begin to spend again, but entrepreneurs begin to find ways of discounting really good inventory, and consumers are sitting out there and are sort of being brought in to buying again by these very clever business people.”
Other indicators of recovery were stabilizing home prices and foreclosure rates, which he said showed the housing market was beginning to level off. Foreclosures, according to Beach, are healthy for the economy because they provide a way for banks to get rid of excess stock and clear their balance sheets.
“We’re beginning to see the full collapse of housing and construction, and that’s a good sign for recovery because you’ve got to get this inventory washed out through the foreclosure process, and in certain markets prices are beginning to firm up,” said Beach.
“We’re beginning to see the first firmness in prices that we’ve seen since the beginning of 2007 when the collapse was in full swing,” he said. “You’re seeing the types of things you’d expect to see when you’re getting toward a bottom.”
The fact that the economy is showing “signs of spring” without any help from the federal government’s $787-billion stimulus package, said Beach, shows that government cannot spend the country into prosperity.
“Most of it’s not even out of Washington yet,” Beach said, referring to the federal stimulus money. “It’s one more additional confirmation of what we’ve known for a long time: that the spending of government isn’t the thing that ends recessions.
“There’s no connection at all between the signs of spring that we’re seeing here in the recovery and the spending,” said Beach.
He added that the only thing government could do now was get in the way, adding that the biggest risk comes from government pumping more money into zombie banks who should have gone bankrupt long ago.
“Some of the work done by the Treasury Department to stabilize GM, stabilize the financial markets, has been harmful to the economy,” he said, “and that’s what worries me. TARP funding and bankruptcy talk and trying to stabilize companies who should be bankruptcy court, it all springs back.”
“I think the biggest risk to the economy is coming from the federal government,” said Beach. “I’m worried about their passing laws and spending more money on failing banks, which would hold things up. These well-intended efforts to try to manage a highly complex system, which the pros in the industry know just can’t be managed from Washington.”