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Economy hits expansion mark in style

Published Sep. 26, 2005

As the nation reaches a record for economic growth, spending continues to explode.

Americans went on a buying binge in December, capping a year where spending outpaced income and took its biggest leap since 1989. That pushed the nation's savings rate to an annual low.

Spending rose a bigger-than-expected 0.8 percent in December, the fastest pace since August, the Commerce Department said Monday. Consumers' burst of buying helped give retailers their best year since 1992. At the same time, Americans' personal income, which includes wages, interest and government benefits, increased by a smaller-than-expected 0.3 percent, dragged down by much smaller federal subsidy payments to farmers.

"Consumers ended the millennium with a bang," said Merrill Lynch economist Andrew Groat.

The economy reaches a milestone today as the current expansion that began in March 1991 becomes the longest in American history at 107 months, beating the old mark of 106 months set during the 1960s.

Hardy consumer spending has been the engine behind the economy's rapid growth. The economy grew at a sizzling 5.8 percent annual rate in the last three months of 1999 and 4 percent for the year.

Most economists believe the Federal Reserve, which raised interest rates three times last year, will bump them up again Wednesday to slow the economy and keep inflation low. Economists fear that the economy's rapid pace of growth can't be sustained without producing a sharp run-up in consumer prices.

"The economy is growing so fast that even the Federal Reserve hasn't been able to slow it down, and that's why they will be raising rates again," said Richard Yamarone of Argus Research Corp.

Economists, in fact, are looking for as many as three more rate increases before summer, bringing the total number of credit tightening moves to seven in one year.

By almost any measure, these are good economic times. Unemployment is at its lowest level in 30 years, 4.1 percent, consumer confidence is at record highs, and Wall Street has just wrapped up an unprecedented five straight years of returns of 20 percent or more in the S&P 500 stock list.

Long past the time that most expansions are showing their age, this one seems to be getting stronger, with 1999 marking the third straight year with growth at 4 percent or more.

The absence of inflation pressures so far has allowed the Fed to let unemployment fall far below the 6 percent level that economists used to believe signaled dangers of rising wage pressures.

The remarkable combination of low unemployment and low inflation is often cited by proponents of a "New Economy" theory for why the current expansion has lasted so long.

They believe the billions of dollars invested in computers and other high-tech products has boosted America's productivity, the amount of output per hour of work. That, combined with new competition from the global economy, has kept the lid on prices, many analysts argue.

But even staunch supporters of the New Economy idea caution that the business cycle has not been repealed and there will be another recession; they just don't have one in the forecast now.

"There is a possibility that the expansion could run into trouble in the next two or three years, but right now the types of forces that start us toward a recession are still not in play," said Allen Sinai, chief economist at Primark Global Economics in New York.

Still, with plentiful jobs, rising incomes, low inflation and stock market gains, Americans are feeling wealthy and in the mood to buy, economists said.

For all of 1999, spending rose 6.9 percent, the fastest pace in 10 years, while income rose 5.9 percent to match the increase posted in 1998.

Because Americans are spending more than they earned, the personal savings rate _ savings as a percentage of after-tax income _ was pulled to an all-time annual low of 2.4 percent in 1999.

For December, the savings rate hit a monthly low of 1.5 percent.

The savings rate had dipped to record monthly lows, in negative territory, several times in 1999. But a comprehensive overhaul late last year in how the government calculates the gross domestic product _ the total output of the country's goods and services _ has pushed the savings rate into positive territory. The revisions showed that Americans are saving more than previously thought.

The record low savings numbers posted for December and for the year, however, aren't as dire as they seem, economists said. That's because the rate doesn't represent Americans' personal wealth, which would involve calculating the gains households have realized on their savings in previous months from such things as rising stock market values and higher real estate values for their homes.

"We're a nation of spendthrifts. We always have been, and that's probably not going to change. But the situation is not as bad as it seems because of the way the savings rate is calculated," said Yamarone with Argus Research Corp.

The sharp advance in December's spending reflected a 1.3 percent increase in purchases of nondurable goods, such as food and fuel. Spending on durable goods rose 0.8 percent in December.