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April 30, 2008, 11:29PM
Worried consumers hit brakes on economy
By PETER S. GOODMAN
New York Times
For months, beleaguered American consumers have defied expert forecasts that they would soon succumb to the pressures of falling home prices, fewer jobs and shrinking paychecks. Now, they appear to have cracked.
On Wednesday, the Commerce Department reported that the economy continued to stagnate during the first three months of the year, with a sharp pullback in consumer spending the primary factor at play.
Pressures on households in which cash is tight appeared to weigh significantly in the calculations of the Federal Reserve as it rolled back interest rates Wednesday for the seventh time in eight months â€” this time by one-fourth of a percentage point â€” in a bid to prevent a further fall- off in the economy.
The Fed made clear, though, that investors and borrowers should not expect another drop in interest rates anytime soon. In the statement accompanying their action, policymakers said they believed that with the short-term rate at 2 percent, they had already unleashed enough economic stimulus to "help promote moderate growth."
With the overall economy growing at a mere 0.6 percent annual rate for the second quarter in a row, consumer spending advanced by only 1 percent, the government estimated. That was down sharply from the 2.9 percent gain for all of 2007 and the 3.1 percent gain for 2006. It was the weakest showing since 2001, the last time the economy was ensnared in a recession.
Even more ominously, Americans cut back on a wide variety of discretionary purchases, conserving their cash for necessary spending.
Signs of growing distress
As real estate prices plunge, so does the ability of homeowners to borrow against the value of their homes, crimping a major artery of spending. As banks grow tighter with their dollars in a period of uncertainty, families are running up against credit limits, forcing many to live within their incomes. And as companies lay off employees and cut working hours, paychecks are effectively shrinking.
Consumer spending fell for a broad range of goods and services, including cars, auto parts, furniture, food and recreation, reflecting a growing inclination toward thrift.
The fact that the economy expanded at all, even by a tiny margin, sowed hopes that a recession might yet be averted. But most economists found in the details of the preliminary report signs of broadening economic distress at home even as businesses expanded production to meet growing demand from abroad.
A panel of economists at the National Bureau of Economic Research, a private research organization, ultimately decides whether a particular period of weakness qualifies as a recession, which it defines as a "significant decline in economic activity spread across the economy, lasting more than a few months."
Not in a recession?
"The argument that we're not in a recession certainly gets a little bit more of a boost from this report," said Jared Bernstein, senior economist at the labor-oriented Economic Policy Institute in Washington.
The only factors preventing the economy from sliding backward were the growth of American exports â€” aided by a weakening dollar â€” and a swing in business inventories from shrinking to swelling. Putting exports and inventories aside, the final sales of goods and services produced domestically dipped at a 0.4 percent annual rate in inflation-adjusted terms, the first such decline since the end of 1991.
Economists suggested that larger stocks of unsold goods might portend trouble in the months ahead. If business does not swiftly improve, allowing factories to sell the products they have piled up, firms are likely to lay off workers at a more aggressive clip.
The biggest questions ahead center on the duration and severity of the downturn. Attention now turns to the job market and the stimulus checks being sent out to 130 million American taxpayers to encourage spending.
Wall Street reacts
Right after the Fed's move to cut interest rates, Wall Street investors drove the Dow Jones industrial average up more than 178 points â€” lifting it above 13,000 for the first time since early January. Then traders' caution returned, and the index ended the day 11.81 points below where it started.