Can Consumer Purchasing Power Sustain the Current Economic Recovery?

By Scott Lilly | July 1, 2004

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The Federal Reserve chairman, every official within this administration, most market analysts and a majority of financial writers agree that the outlook for the American economy is good if not excellent. The scenario is familiar to even the most casual reader of the nation's business pages. Strong gross domestic product growth over the past year has finally been accompanied by strong employment growth. Households with their pocketbooks fattened by an expanding job market will buy more and corporate executives who have been sitting on huge piles of cash will finally put that cash to work, investing in new plants and equipment, building inventories and hiring still more workers.

It all sounds convincing but there is still reason for prudent policy makers and careful investors to be skeptical. Both statistical and anecdotal evidence indicate serious weakness in the current recovery and point to the distinct possibility that it will fall apart completely over the course of the next six to eight months. The first reason for concern is the abnormal nature of the recession from which the economy is attempting to recover.

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