Deller's two cents:  Note what may be good for the individual may not be good for the larger economy.  From a personal finance perspective running up credit card debt is probably not a good thing.  But for the larger economy breaking out that credit card helps spur economic growth.  A major reason this recession has been so slow to recover is that individuals and businesses have not been "pulling out that credit card" and spending.  Consumers seem to have said, we have waited long enough.  Now lets see how businesses respond, do they start investing and hiring people?

Economic Week in Review: Shoppers break out the plastic

February 11, 2011

The light slate of economic news this week dealt with rising demand. Higher oil prices and a healthier appetite for spending led the U.S. trade deficit to increase in December, as imports grew more than foreign demand for U.S. exports. Increased spending also translated to higher consumer borrowing. In international news, political unrest in Egypt continued for a third week, disrupting the country's economy and keeping its stock market closed.

 

For the week ended February 11, the S&P 500 Index rose 1.4% to 1,329 (for a year-to-date total return-including price change plus dividends-of about 5.9%). The yield of the 10-year U.S. Treasury note fell 4 basis points to 3.64% (for a year-to-date increase of 34 basis points).

Consumers borrow more

In a spending mode for the holidays, consumers loosened their purse strings in December much more than expected. Total credit outstanding rose more than $6 billion, compared with a consensus forecast higher than $2 billion. December represented the third straight month of higher total consumer credit balances. Perhaps even more significantly, revolving credit (primarily credit card debt) increased for the first time in more than two years. Nonrevolving credit also grew, but at a slower pace, as sales of new and used vehicles were relatively steady.

 

"This is a significant milestone in terms of the recovery," Vanguard economist Roger Aliaga-Díaz observed. "Going forward, consumers may have more money available for spending as they pay down less debt-which will contribute more to overall economic growth. This moderate increase in consumer credit doesn't mean that households are undoing the painful but healthy debt reduction of the last two or three years. As long as borrowing keeps pace with income growth and wealth creation, household balance sheets should remain in good shape."

Trade gap widens

The U.S. trade gap expanded to $40.6 billion in December, in line with consensus expectations. The dollar value of both exports and imports climbed to levels last seen more than two years ago-a sign that the global economic recovery is proceeding. But import demand, led by rising crude oil prices, grew even more than overseas demand for U.S. goods and services. Notably, imports from China decreased, suggesting that the gradual appreciation of China's yuan relative to the U.S. dollar is having an impact on demand.

 

For the 2010 calendar year, the strengthening economy and rising demand-including for imports-were evident in the nearly $500 billion deficit for total goods and services, almost one-third higher than the $375 billion trade gap in 2009.

 

"Although Chinese currency appreciation helps to close the U.S.-China bilateral trade deficit, there are other more domestic challenges the United States needs to address in order to balance its overall trade deficit," noted Mr. Aliaga-Díaz. "If we think of the U.S. trade deficit as the result of excess spending by both the private sector and the U.S. government, then the two priorities-when it comes to closing the trade gap-are a high level of household savings and low government budget deficits."

The economic week ahead

A broader menu of economic reports is on tap beginning on Tuesday with retail sales and business inventories, followed by producer prices, new residential construction, industrial production, and the latest minutes of the Federal Reserve's Open Market Committee on Wednesday. Consumer prices and The Conference Board's leading economic indicators are scheduled for Thursday.

 

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Steven C. Deller
Professor and Community Development Economist
Department of Agricultural and Applied Economics
515 Taylor Hall --- 427 Lorch Street
University of Wisconsin-Madison/Extension
Madison, WI 53706
608-263-6251
"I started out with nothing and I have most of it left."
Seasick Steve