As demand wanes, there will be a moderation in the strong employment rend that we have been experiencing. In 1994, close to three million jobs have been added. Next year, employment growth will taper off. As employment gains decelerate, income gains will also moderate. Real disposable income has been expanding at a 3 percent annual rate–helping to fuel some of the past strength in consumer spending.
Over the next year, however, real incomes will expand at a more subdued rate, dampening the outlook for spending. In the business sector, firms’ optimistic assessment about the economy has led them to aggressively build inventories. This has made a positive contribution to GDP growth. Going forward, this source of strength will dissipate as production gets rolled back to adjust to slowing final demand.
Two areas of potential strength for the economy next year will be business investment and trade
Investment, especially in information technology, will continue to be a priority of companies as they seek to improve their productivity. This positive trend will help to contain inflationary pressures. Exports are expected to accelerate as foreign economies improve. With domestic demand slowing, import growth should abate. The trade balance, therefore, will improve and be another contributing factor to overall economic growth.
March 1995 will mark the fourth anniversary of the current expansion. The first couple of years were characterized by sluggish growth. In 1992-93, the Fed pursued a policy to reduce interest rates in order to stimulate activity. The result has been a strong economy in 1994. Now that Fed policy is headed in the opposite direction, the slowdown will come with a lag. In 1995, real GDP will approach the Fed’s target rate of 2.5 percent.
Furniture and Appliances Fading
Sales of home goods achieved their post-recession peak in 1993 with real growth of 10.3 percent. Growth in 1994 will be only slightly lower than 1993 at 9.9 percent. Hereafter, sales increases will ratchet down, but still remain a solid 7 percent in 1995.
The trend in merchandise typically bought to furnish a home is already reflecting the topping out of the housing market. Spending on furniture has lost its momentum. Real increases of 7 percent a year ago are now down to 1 to 2 percent. Appliances are doing better, but even their growth rates are decelerating. Real gains of 8 to 9 percent a year ago have slowed to almost half that pace this year.
Sales of floor coverings have been the laggards during the expansion with real growth last year of only 2 percent. During 1994, sales growth has been accelerating. These products are benefiting from much of the remodeling being done by homeowners. Real spending on carpeting and other floor coverings are registering gains of 10 percent.
Computers and Electronics Still Hot
The strength in the home category of merchandise is being driven by extraordinary increases in personal computers and video equipment. Spending on computers is 17 percent ahead of a year ago. However, when adjusted for the 10 percent deflation in this merchandise, real gains are 27 percent.
While this increase is extraordinary, a year ago it was even higher–reaching over 40 percent in real terms. The fast moving pace of computer technology combined with the development of user-friendly software packages have made home PCs a very appealing product to a wider audience.
Spending for TVs, VCRs and other video equipment, has been increasing at a consistent 20 percent real rate for the past year and a half. Demand for these products has also been stimulated by improved technology and declining prices.