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Economy showing signs of improvement

Spotlight On Finance

— Economic conditions have improved from last year, both in the United States and overseas.

Europe’s financial crisis has responded to efforts to stabilize conditions there, and the countries of Europe are working on the underlying problems. The emerging economies have reined in inflation and have focused on increasing economic growth.

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Michael Durand, Senior Vice President and Senior Portfolio Manager, Capital Region, Key Private Bank.

In the United States, stabilization in the housing markets and relief from worry about a fiscal crisis have allowed the U.S. economy to reaccelerate from weak fourth quarter growth.

Yet there are still headwinds to faster growth. U.S. consumers remain income constrained, and business confidence is still mired at very low levels. Improving conditions overseas should generate faster global growth, but doubts about that recovery have grown.

Economic growth and the financial markets tend to follow money growth, however. The torrent of money being infused into the U.S., Japanese and other world economies suggests that while economic growth could remain disappointing, outright recession is very unlikely. Thus, although the outlook is not without worries, it remains reasonably positive.

Consumer Spending

Consumers have done what they could to support the economy. Spending has risen faster than income when gains were below trend, but people have also been slow to consume gains that exceed longer-term income growth.

At least in part, the Federal Reserve is betting that quantitative easing will reignite the powerful consumer spending growth that drove the U.S. economy over the last 30 years. Theoretically, consumers spend more when investment portfolios or houses appreciate in value so that asset wealth increases. Yet people spend 93% of after-tax income, and incomes have grown slowly. After several difficult years, any “wealth effect” may spur less spending growth than it might have at one time.

Business Investment

Small businesses have provided most of the employment gains in recent years. However, those businesses are often heavily dependent upon consumer spending. When consumers have less to spend, small businesses have less reason to invest and grow. Over the last four years, export growth has provided a critical supplement to weak consumer spending, making overseas revival more critical.

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