March 30, 2012 at 1:17 PM ET
The daffodils are up, the job and housing markets are improving, businesses are more upbeat and consumers are getting back in a spending mood.
Unfortunately, American households are dipping into savings and tapping credit cards to pay for their latest shopping spree. Unless their paychecks begin expanding at the same pace, the new spending, and the boost it's giving to the economy, may not be sustainable.
"While households want to spend and will raid their bank accounts to support that habit, unless income gains start improving consumption will have to slow," said Joel Naroff, chief economist at Naroff Ecoomic Advisors.
After a long, slow recovery from the 2007 recession, consumers are feeling more upbeat about the economic outlook in 2012. Five years after the worst housing collapse since the Great Depression, home prices in many markets are beginning to stabilize and sales are perking up. The job market, though still very tight in many industries and occupations, has been creating new openings at a healthy clip. The stock market is up nearly 30 percent in the past six months.
All of which helped boost consumer confidence to its highest level in more than a year in March, according to the latest reading by Thomson Reuters and University of Michigan. The upbeat mood has been showing up in other consumer surveys.
It's also showing up in the data on consumer spending, which rose 0.8 percent, according to the Commerce Department. Spending on durable goods like cars and trucks rose sharply. January's spending was revised up to 0.4 percent from a previously reported 0.2 percent gain.
The spending gains have also helped boost wider optimism about the economy and has prompted some forecasters to lift their estimates for the pace of growth this year.
"So long as the consumer is spending, that's the biggie everyone is watching as they drive the economy," said Wayne Kaufman, chief market analyst at John Thomas Financial.
Not all of the spending boost came from increased confidence. Higher gasoline prices have forced households to shell out more at the pump even if their paychecks are able to stretch far enough to make up the difference. The energy component of the Commerce Department's spending data surged 3.6 percent last month, largely due to higher gasoline prices, which have jumped 62 percent so far this year.
Some forecasters think the pain at the pump will get worse before it gets better.
"The bad news is that pump prices will start approaching the $4.15-$4.20 per gallon range by Memorial Day," said Chris Christopher, a senior economist at IHS Global Insight. "The good news is that a relatively stronger job and stock market are assisting in holding up consumer spending and confidence."
After several false starts, the job market seems to be gaining strength, adding nearly 250,000 jobs a month for the last three months, helping to bring the unemployment rate down to 8.3 percent from 9.0 percent in September.
Some small business owners are report that they plan to hire this year. About a third of those surveyed by payroll processor Sure Payroll said they plan to take on more workers in 2012, with only two percent planning layoffs. The rest expect to keep staffing levels where they are. Nearly 80 percent of those polled said the pace of business met or exceeded their expectations in the first three months of this year.
The hope is that continued improvement in the job market will translate into higher wages, which would help sustain the recent pickup in spending. Until then, consumers are leaning on their savings and credit cards to pay for the spending increase. Personal income inched up just 0.2 percent last month; disposable income, the amount left after taxes and inflation, fell for a second straight month,
That means dipping into savings and borrowing more. The savings rate, the amount of disposable income households have socked away, dropped to 3.7 percent, the lowest rate since August.
After steadily declining during the recession, the total level of revolving credit outstanding bottomed in May 2010 and is up 8.3 percent since them, according to the latest data from the Federal Reserve.