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May 29, 2001

Consumers Are Buying, But Not For Long

Don't be fooled into thinking that higher consumer spending numbers mean the economy is turning around.

When adjusted for inflation, consumer spending increased only 0.2%. Although Americans spent more on services, food and clothing in April, they spent less on durable goods like cars and appliances. And sales of both new and existing homes fell in April.

Americans also spent more than they earned, causing the savings rate to fall from -0.6% in March to -0.7% in April. Spending more than you earn is not a good idea if you are already deeply in debt and facing increased prospects of unemployment. Consumer debt is at historic highs, and consumer and business bankruptcy filings were up 17.5% in the first quarter. Jobless claims continue to rise, and the June employment report, to be issued Friday, is expected to show a three-year high in the unemployment rate.

As Fed Chief Greenspan acknowledged last week, consumer spending -- which accounts for two-thirds of the country's economic activity -- has a huge impact on the economy. But with increased levels of unemployment and minimal savings to fall back on, Americans will be forced to cut their spending, dragging the economy down even further.

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