Soft Patch Might Ground the Fed's Liftoff

For many months, economy watchers have been obsessed with "liftoff": the moment the Federal Reserve raises short-term interest rates, which have been held close to zero since late 2008.

Fed Chairwoman Janet Yellen has indicated that, if the economy grows as it has, that moment would come "at some point this year" - generally taken to mean either the September or December meeting of the Federal Open Market Committee (FOMC), the Fed's key decision-making body.

Frankly, I've assumed that it's a done deal. The economy seems to be growing solidly, if not spectacularly.

After a rough winter, gross domestic product increased at a 2.3% rate in the second quarter; this may be revised upward. The unemployment rate is 5.3%, and payroll jobs have risen at a monthly average of 243,000 for a year.

Now, I'm having second thoughts. What prompts my doubts is a recent report from Economic Analysis Associates.

You've probably never heard of EAA, which is a two-person shop run by Susan Sterne and her husband, Lawrence. They specialize in consumer spending, which accounts for slightly more than two-thirds of U.S. GDP. As the consumer goes, so goes the economy. Their latest report is downbeat - a surprise to them.

They regularly dissect consumer spending on dozens of categories of goods and services, ranging from air fares to day care to used vehicles.

They compare spending in the most recent month with the previous month. The result for June was stunning: Spending was down in 87 of 122 categories.

"I have never seen anything quite like this" - nothing so one sided, says Lawrence Sterne, who has overseen two decades of these comparisons.

Typically, he says, spending on durables (long-lasting items like cars, appliances and furniture) fluctuates, because big purchases can be delayed, while spending on nondurables (food, gasoline, clothing) and services (restaurant meals, cable TV, electricity) is more stable.

Now, all categories seem to be softening. Either "the consumer is much weaker than generally thought," he writes, "or the data is very, very bad." (The data come monthly from the U.S. Bureau of Economic Analysis.)

If the consumer weakness is real, its causes are unclear, says Susan Sterne. She doubts that Americans are reacting to foreign economic crises.

"It's not China or Greece," she says. "The average American on the street isn't dwelling on China or Greece."
What's especially worrisome, she says, is "housing areas of spending are weakening - furniture, small appliances, building materials."

That could signal that home sales and construction will provide less support for the recovery.

Of course, all this could be a statistical mirage. It's only one month's data, and the figures on weakening sales that I've cited need to be qualified.

First, the data reflect unit volumes of sales (say, the number of cars sold) and not dollar amounts; when prices are included, the data are less lopsided. And second, the data are also a 12-month moving average that includes the 11 previous months. This makes interpreting any one month's results harder.

What should the Fed do?

There are other signs of flagging economic growth: weak international trade and commodity prices; China's recent currency devaluation.

Still, if a broader consumer slowdown materialized, it would overshadow these and threaten the Fed's "liftoff."
The Fed needs to be on the watch for further harbingers of a slowdown.