Pete Fischer put off home-improvement projects last year after his income dropped by more than US$30,000. That was before his mechanical engineering business began to pick up and he reduced expenses by refinancing US$70,000 in debt through a lower-interest home equity loan.
Fischer, 62, bought drywall and lumber with what was left over. "I'm building me an office down here, and a bathroom and a playroom," he said in the basement of his home in the Atlanta suburb of Norcross. Fischer said he's already booked US$17,000 of business this year after making US$22,000 in 2001. "I think the economy's picking up. Slowly."
Slow. Gradual. Limited. They're all words used by Federal Reserve Chairman Alan Greenspan in recent months to describe the likely pace of economic recovery. Among his chief concerns: Consumers are tapped out after they spent more than expected in the last six months, buoying the economy during the recession.
They're ignoring him. "I'm just absolutely amazed with the US consumer," said Steven Wood, chief economist at Walnut Creek, California-based FinancialOxygen Inc. "The consumer is what made the recession short and shallow, and they're still driving the expansion."
Applications for loans to buy houses are at an all-time high. More homeowners are refinancing mortgages to reduce their payments or take out cash to refurbish their homes. And new car sales may set a record this year.
Retail sales for April, which will be reported today by the government, are expected to show the biggest increase since October. Spending grew at a 3.5 percent annual rate in the first quarter after surging at a 6.2 percent pace in the final three months of last year -- the biggest gain in 3 1/2 years.
Such gains are probably a surprise to Greenspan, who said in March that while household spending should increase, "the potential for significant acceleration in activity in this sector is likely to be more limited than in past cycles."
Increased spending is also unexpected because it's occurring in an economy that just started creating more jobs than it's losing. Even with a gain of 43,000 in April -- the first rise in nine months -- the economy has lost 86,000 jobs so far this year on top of more than a million shed in 2001.
The US Fed under Greenspan cut its benchmark overnight rate an unprecedented 11 times last year and has kept it at a 40-year low of 1.75 percent since December. That's made it cheaper for consumers and businesses to borrow.
The yield on the benchmark 10-year Treasury note, to which many fixed-rate residential mortgages are tied, has fallen more than a quarter percentage point since April 1. The yield on the two-year note, a benchmark for other lending, is more than a half-point lower.
Receipts are accumulating everywhere from checkout counters to car lots. Cars and light trucks sold at a 17.3 million annual rate in April, the fastest pace in five months, spurred by incentive programs. That's more than the 17.2 million vehicles sold in 2001, the second-best year on record. The April increase was led by a 13 percent gain at General Motors Corp from the same month last year.
The pace of spending is most evident in the housing market.
Previously owned US homes sold at a 5.4 million annual clip in March, above last year's record 5.3 million rate. The National Association of Realtors expects sales this year may top last year's. And they have plenty of data to support that view. Applications for loans to buy houses rose to the highest on record in the first week of May, the Mortgage Bankers Association of America reported. The previous record was set in the first week of January. Builders recorded more permits for single-family houses in the first quarter than in any prior first quarter, according to US Housing Markets.
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