Spending's in Style Now That Jobs Seem Secure
All year long, economists and government policy makers have been surprised at the strength of consumer spending. The chart at right shows a key underlying reason for that surprising robustness - the strength of the 1994 job market.</br></br>Late in 1993, most forecasters predicted that 1994 would be a good year for the economy, with growth sufficiently solid to reduce the unemployment rate modestly. Instead, consumer purchases soared, especially for expensive, long-lasting goods, such as new cars and furniture, and the economy took off. By last month the unemployment rate was down to 5.6 percent, compared with 6.7 percent in January.</br></br>The whole process fed on itself, in a fashion reminiscent of the burst of economic activity - which economists sometimes call a "snapback" - that usually comes immediately after a recession. More spending triggered more production, more production meant more jobs and more income yielded more spending.</br></br>Years ago, when he was a private economic consultant, Federal Reserve Chairman Alan Greenspan closely watched the layoff rate - a figure that later fell victim to budget cuts at the Bureau of Labor Statistics - for an early signal that a recession was about to end. Greenspan said that when the layoff rate began to fall and workers who had feared for their jobs began to relax, those still at work were apt to increase their discretionary spending once more.</br></br>The chart underscores the unusual nature of the business cycle that began when the economy slumped in the summer of 1990 and began to recover the following spring. For a variety of reasons - including huge business and consumer debt loads and a financial system in deep trouble - there was no snapback. As many firms sought to cut costs to cope with the new low-inflation environment and fierce competitive pressure from foreign producers, they continued to lay off workers - long after the economy started growing again. In the manufacturing sector in particular, productivity gains allowed firms to increase production while cutting their labor force.