Last year was a decent but not spectacular year for overall U.S. consumer spending, which rose 3.8% in inflation-adjusted terms. However, the gains at the high end of the scale -- so-called luxury goods -- were far more impressive. Precise figures differ, depending on how one defines this category, but the gain seems to have been in the 10%-to-12% range, matching if not exceeding the halcyon days of the late 1990s. However, the boom is just about to come to an end.
Several factors fueled the boom last year. While the rise in the stock market was nowhere near as spectacular as the late 1990s, it contributed almost as much to the purchasing power of the upper-income set, because many of those high-tech gains in 1999 and 2000 were never realized. For a better measure of spending power, we ought to look at the S&P 500, which rose from a trough of around 800 in March 2003 to a level of about 1200 by the end of 2004, a 50% gain. By comparison, the S&P 500 rose from about 1170 in mid-1998 to a peak of 1550 in March 2000, a substantial but nonetheless smaller percentage gain of 32% over a similar seven-quarter period.
Also fueling the recent boom was the tremendous gain in housing prices. The median price of homes rose 11% last year, which is a record in real terms. But that was really just the tip of the iceberg. Down in my neck of the woods, namely Palm Beach County in Florida, realtors report that the median price rose 36%. Similar magnitudes have been reported for most of the pricey sections of the country, almost all of them on one coast or the other. Along the same lines, home equity loans rose an astounding 41.6% last year.
Although the influential federal funds rate has now risen substantially from its 1% trough, that historically low level until April 2004 also fueled some of the recent spending boom, allowing the rich to borrow millions and millions of dollars while keeping their money in existing assets -- or in many cases, borrowing on margin to take advantage of the rise in the stock market.
Finally, the sharp decline in the U.S. dollar that started in spring 2002 and continued through the end of 2004 meant that many rich foreign consumers found that prices in the U.S. were relative bargains; while not cheap in the usual sense, prices did fall some 32% for those who reckon in euros.
All such boom fuel is now in shorter supply. The stock market will not rise further this year and is likely to decline over the next several months. The housing bubble hasn't burst yet, but more moderate increases in prices are likely to dominate the rest of the year. The federal funds rate, the interest banks charge each other for overnight loans, is likely to move above 3%. Finally, although the U.S. dollar will remain weak, it will rise somewhat during 2005 in line with the increase in interest rates.
Few of us feel much sympathy for those wealthy individuals who may have a bad year in 2005 -- and in 2006. Nonetheless, to the extent that their purchases trickle down and create employment for the rest of us, a spectacular gain was one of the major factors pushing the U.S. economic growth rate above 4% for the past two years. As these purchases wind down, overall growth in the U.S. economy should decline to 3% this year and to 2% in 2006.
Michael K. Evans is chief economist for American Economics Group, Washington, D.C., and president of the Evans Group, an economics consulting firm in Boca Raton, Fla.