Brooklyn's Progress
August/September 2005

By Mitchell J. Held

We’ve heard the negatives for some time.  There’s too much debt, the tax cut is long gone, outsourcing and restructuring are rampant, energy bills will sap any spendable income the consumer may have and so on.  Yet reports from the frontline differ.  Sales are rising with vigor; even the moribund auto industry has caught the attention of consumers.  What’s going on?

Sure, there are clouds, but don’t overlook the rather abundant field of positives.  Incomes are rising at more than twice the inflation rate – sentiment surveys may suggest otherwise but consumers spend income, not confidence.  A better job market has helped – the unemployment rate is 5 percent and that’s down by more than a percentage point over the past two years.

Debt is higher, but during the past few generations, debt as a percent of disposable income almost always has been higher.  Fact is, however, lower long-term interest rates and the many rounds of mortgage refinancings have pushed the debt burden lower.  Higher short-term rates are beginning to favorably impact interest income.

And no look at the balance sheet is complete without a trip to the asset side.  Markets (stocks, bonds, real estate) generally have moved higher over the past few years.  This bolsters net worth and is consistent with a lower savings rate and higher spending rates as well.

Outside of another significant run-up in energy costs or an unexpected geopolitical event, economic downturns tend to be tipped off by aggressive changes in policy.  Higher short-term interest rates have slowed the stimulus but haven’t stopped it.  Clearly they’re not high enough to reverse it.  Until such a time, the consumer will do what it does best – consume.

Mitchell J. Held is a managing director in the Economic and Market Analysis Department of Citigroup Global Markets.  Mr. Held, with more than 29 years of experience in the economics and investment field, focuses on delivering the economic message to Smith Barney’s Private Client Group. In addition to Smith Barney, Citigroup, a leading global financial services company, includes under its umbrella Citibank, CitiFinancial, Primerica and Banamex. Additional information may be found at http://www.citigroup.com/.