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In 2002, consumption will continue growing, although at a moderate rate of an average 1.9% increase per quarter (seasonally-adjusted annualized rate) versus the 3.5% increase we enjoyed in the first quarter. But as the year progresses,
there's going to be a healthy transition from consumption-led growth to
investment-led growth, as businesses see a sustainable recovery and investments
made in the 1990s become obsolete The growth in consumption has been based on sustainable trends. Personal income has been growing at a relatively fast pace and consistently faster than expenditures. More, the value of the labor force has increased substantially in recent years. This creates an asset (i.e., strong lifetime earnings potential) that supports solid consumption growth. Other factors that will act positively on consumption include: A lower unemployment rate than was the case from the 1970s through the mid-1990s (down from 6%-8% to the new range of 4%-6%); strong productivity growth, averaging 3.2% per year over the last three years; and increased labor flexibility. Also, the level of unionization in the U.S. fell to 13.5% in 2000, and a mere 9% if you exclude the heavily unionized federal, state, and local government workers. These are all labor force — and hence consumption — positives. The consumption bears counter that the government's indicator of the personal savings rate has fallen. And while this is true, the personal savings rate is not a very useful indicator. To the extent that it declined at all, some of that decline would simply be the large increase in taxes paid to the government (rather than an unsustainable pace of consumption). It's better to look at changes in people's net worth than on savings. The consumption bears also say that the consumer balance sheet is weak. But this is untrue. Despite the drop in stock-market values since 2000, consumer net worth is still at a high level. The net worth of the consumer sector is high even when the value of housing is not included but the mortgage liability is. Consider the change between 1995 and 2001: Total financial assets (i.e., not including the value of housing) of the household sector rose by $10.4 trillion to $32.1 trillion between 1995 and 2001. Total financial liabilities (i.e., including mortgages) of the personal sector rose by $3 trillion to $8.1 trillion between 1995 and 2001. That means that a very conservative estimate of household net worth rose to $24 trillion in 2001 from $16.5 trillion in 1995. The gain in net worth is bigger if it includes the value of housing. The Fed's measure of the net worth of households reached $40.3 trillion in 2001, up from $27.2 trillion in 1995. The consumption bears also note that household balance sheets took a hit from the stock market in 2000 and 2001. Yes they did. Financial assets in the household sector fell to $32.1 trillion in 2001 from $35 trillion in 1999, a near 10% drop. Household net worth (excluding housing) in 2001 was $24 trillion, down from the 1999 peak of $28.1 trillion. As noted in a recent speech by Federal Reserve Board Governor Edward Gramlich, the average ratio of household wealth (including housing values) to disposable income was about 4.5-times during the 1970 to 1995 period. The wealth-income ratio reached 6-times in 2000. But even with the subsequent stock-market bust, the ratio is still above 5-times. That seems to mean that the balance sheet is still strong by long-term averages, and will not be a constraint on the moderate growth in consumption we can expect in 2002 and 2003. Consumption growth
can be sustained based on the continuing growth in personal income, the
strength of the consumer's balance sheet, and the value to the worker
of productivity growth, labor flexibility, and a relatively full employment
economy. The consumption bears are all wet on this one. — Mr. Malpass is the Chief International Economist for Bear Stearns.
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here's
a bearish view going around that the consumer is "tapped out."
But it doesn't look like the consumer's balance sheet poses a constraint
on consumption growth. In fact, the overall balance sheet is in reasonably
good condition. 
