Consumers Are Still Key to Avoiding a Recession


Recession predictions are all over the map right now. Alan Greenspan thinks there's a one-third probability. Economist David Rosenberg of Merrill Lynch estimates there's a 55 percent chance. Joel Prakken, chairman of Macroeconomic Advisers, thinks there's "well less" than a 50 percent chance┬ľand dropped his rough estimate to around 20 percent after a bit of hectoring by me. (Prakken also expects growth in gross domestic product to "pop back up" in the second half of the year, to at least 3 percent.)

Now, remember that at any given time, according to Deutsche Bank using Federal Reserve numbers, there's a 15 percent chance of negative growth, meaning there's always a 5 percent chance of back-to-back negative quarters. (That's the back-of-the-envelope way of determining a recession.) As it always seems to be, the key going forward is the consumer. That's one reason why economists will be closely watching Friday's job report. (The private-sector ADP report predicts that 57,000 new nonfarm, nongovernment jobs were created last month.) But here are a few positive facts about consumers.

1) Household balance sheets are pretty healthy. According to new Fed data, household net worth increased $1.4 trillion last quarter, and the ratio of net worth to income increased from 5.67 to 5.75. That's the highest ratio since 2000, according to JPMorgan Chase.

2) The decline in mortgage equity withdrawals doesn't seem to be hurting consumer spending. The withdrawals fell last quarter to their lowest level of this expansion and are now 75 percent below its peak. Yet during the fourth quarter, consumer spending grew at a 4.2 percent clip, faster than the 2.8 percent pace of the third quarter.

3) Wage and income growth continues to improve. Real disposable personal income increased 0.5 percent in January, compared with an increase of 0.1 percent in December. And nonfarm hourly compensation during the fourth quarter rose at an 8.2 percent seasonally adjusted annual rate. This was a lot better than the 2.8 percent increase in wages and 4 percent increase in benefits. Here's how Oak Associates economist Ed Yardeni, the guy who crunched these wage and spending numbers, explains the difference:

"This suggests that most of the strength in hourly compensation was attributable to bonuses tied to profits, stock options, and restricted stock. It is unusual for this to happen during the fourth quarter, since big bonus payers, like Wall Street firms, tend to hand out the big paychecks during the first quarter. This means that if in fact bonus payments were that good in Q4, they will be even better in Q1. In other words, consumers should have plenty of money to spend even if the job picture dims a bit at the start of the year."