Some economists are predicting American consumers will curb their spending enough to push the economy into a recession. That's highly unlikely.
Sure, the housing sector is a mess with foreclosures rising, financial markets are in turmoil and gasoline prices are taking off again. Given all that, it's no surprise that consumer confidence is dropping.
All those forces undoubtedly are weighing on household spending decisions. To some extent, the same factors were at work in the third quarter when personal consumption spending rose at an inflation-adjusted 3 percent annual rate.
Certainly it's reasonable to assume there will be a smaller gain in the current quarter. On the other hand, an outright decline hardly seems likely, and since personal consumption represents roughly 70 percent of the gross domestic product, if household spending keeps going up, GDP is likely to do so as well.
Federal Reserve Chairman Ben S. Bernanke told Congress on Nov. 8 that the Federal Open Market Committee "expected that the growth of economic activity would slow noticeably in the fourth quarter from its third-quarter rate." Smaller gains in consumer spending would be part of that slowdown, he indicated.
Bernanke wouldn't assess the likelihood of a recession and stressed that he and his colleagues expected growth to pick up again early next year.
Similarly, on Nov. 9, Macroeconomic Advisers said that recent data "imply a substantial upward revision to third-quarter GDP growth to an astonishing 5.4 percent annual rate." That compares with the Bureau of Economic Analysis official "advance" estimate of 3.9 percent.
Most of the revision will be the result of strong gains in U.S. exports and in the accumulation of business inventories. Macroeconomic Advisers said there may be some statistical "payback" this quarter if those gains are not repeated, with GDP expanding at only a 1.1 percent rate.
And that isn't a recession.
The last quarterly decline in consumer spending occurred 16 years ago that's 64 quarters during the halting recovery from the 1990-91 recession. It never fell during the shallow 2001 recession, which was caused by a big drop in business investment.
It's not just history at work. The fundamentals driving consumer spending are actually in pretty good shape.
The unemployment rate has remained low at 4.7 percent and the number of payroll jobs has continued to rise, with monthly increases averaging 118,000 in the August-October period. With both jobs and pay rising, so is income from wages and salaries.
Some analysts argue that falling home prices are wiping out a chunk of owners' equity and limiting their ability to borrow against it. In addition, having less equity will depress owners' willingness to spend on consumption, they say.
While homeowners' equity has begun to fall and is likely to continue doing so for some time, there are still huge paper gains in place from previous years.