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Personal Spending grows slowly as inflation rises

In the article “Personal Spending grows slowly as inflation rises” Jeremy W. Peters, a regular writer for the New York Times, indicates that the American people are being cautious about the way they spend money in a time when inflation is on the rise. The article begins by showing that although spending has been rising, it has been doing so at a declining rate. Therefore, though the increase in spending in June was 0.4 percent, this reflects a 0.2 percent decline as the increase in May was higher (0.6%).

Trading on the stock market has usually been considered a good indication of the confidence that consumers and investors have in the economy (Jansen & Nahuis, 2002; Fisher & Statman, 2002). This market has been showing decline in the past months and even the past day or two (Peters, 2006). The article makes two conclusions. The first is that American people are now less confident in the United States’ economy.

That is, Americans are being more careful about how they spend money. The article states, “Americans showed some signs of holding back as higher food and energy prices weighed down buying power” (2006). The article also draws conclusions about the actions of the Federal Reserve Bank in regulating interest rates and the implications of this upon the United States economy, declaring that the economic situation in the United States is now unsure given the uncertainty of the Federal Reserve on how to act.

Reason #1

The reason given by the article to support the first conclusion is that though personal income has grown in the past months, consumers are still showing less inclination to increase their spending in accordance with that income increase (Peters, 2006). The evidence is in the percentages quoted by the article, which shows a definite downward trend in the relative increase in American spending over the past two months. The increase is down by 0.2 percent, and this is a concrete indication based on actual numbers.

Reason #2

Another reason given for the conclusion that consumer confidence is down is shown in the fact that consumer discontent has been translated even to investors, who have been showing a similar reluctance to invest (Jansen & Nahuis, 2002; Fisher & Statman, 2002; Peters, 2006). The editorial uses evidence even from the stock market to demonstrate the lack of confidence that appears to prevail in the economy of the United States (2006). “Stocks,” Peters writers, “fell on the news, a sign that investors are worried” (Peters, 2006). Evidence that backs up this statement can be seen in the fact that the Standard & Poor, the Nasdaq, and the Dow Jones all declined on August 1, 2006, compared with trading done the day before (2006).

The induction that can be made from these is as follows:

If the stock market trading is a good indicator of consumer and investor confidence (True)

And if consumer spending is also an accurate indicator of consumer confidence (True)

And if the stock market trading and relative consumer spending have both been on the decline (True)

Then the conclusion that current consumer confidence in the United States economy is on the decline is also true.

The second conclusion made by the writer of the article is that the immediate future of the United States economy is also unsure given the situation that exists in the country. Much hinges on the decision of the Federal Reserve  (which among other things regulates interest rates) and this department of finance is also unsure in the situation about what to do concerning the economy (Peters, 2006).

The problem it faces is the need to balance interest rates with economic growth. The article indicates that though inflation rates are rising, economic growth is at the same time slowing. Peters also indicates that this situation is undesirable to the Federal Reserve and is leading to its uncertainty about what to do (2006).

Reason #1

The reason for this conclusion given by the author of the article is that “Inflation has been running at a rate that is higher than the Fed has said it would like to see” (Peters, 2006). The author also goes on to indicate that the main benchmark for measuring inflation used by the Federal Reserve has shown an increase of 2.4 percent. This is a large growth rate and serves to underscore the Feds uncertainty.

Reason #2

Another reason given for the uncertainty hinges on the first. Such a growth rate as demonstrated by inflation over the past year was last seen in September of 2002—the year following the attacks of September 11, 2001. This demonstrated the United States’ most recent economic downturn. The events of that time and the fact that those events are being mirrored now therefore gives good reason for the lack of confidence that the Federal Reserve has in making decisions about how to fix interest rates.

The induction that can be made from these is as follows:

If the health of the economy is heavily dependent upon the decisions of the Federal Reserve concerning interest rates (True)

And if the Federal Reserve is unsure of what to do, given current inflation and economic trends and previous experience with economic downturns (True)

Then the conclusion that the immediate future of the United States’ economy is unsure is also true.

References

Fisher, K. L. & M. Statman. (2002). “Consumer confidence and stock returns.” SCU. Accessed            August 1, 2006. Available:         http://lsb.scu.edu/finance/faculty/Statman/articles/Consumer%20confidence%20Oct%20            2002.pdf

Jansen, W. J. & N. J. Nahuis. (2002). “The stock market and consumer confidence: European    evidence.” Accessed on August 1, 2006. Available:           http://www.dnb.nl/dnb/bin/doc/ms2002-11_tcm12-36224.pdf

Peters, J. (2006). “Personal spending grows slowly.” New York Times.

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August 1, 2006. Accessed          on August 1, 2006. Available: http://www.nytimes.com/2006/08/01/business/01cnd-     econ.html?hp&ex=1154491200&en=fcb6161b2ab9f926&ei=5094&partner=homepage

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