Power Lunch

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Power Lunch

Consumer Spending Expected to Keep Economy Afloat

A Best Buy salesperson gives change at a Best Buy store in Mountain View, Calif., Tuesday, June 13, 2006. Inflation at the wholesale level slowed in May after two big months of increases, even though gasoline prices and inflation pressures outside of energy and food continued to climb. (AP Photo/Paul Sakuma)
Paul Sakuma

Mark Vitner, senior economist for Wachovia, told CNBC’s “Power Lunch” that consumer spending will remain strong and keep the economy afloat.

He said employment is strong and income continues to grow, creating the conditions for solid, but not spectacular, consumer spending.

“I don’t know that the consumer has to be the savior as long as consumer spending continues to grow,” Vitner said. “We think it will that should keep the economy out of serious trouble. It’s not going to offset the drag from the housing sector by any means. When we were in the midst of the housing boom, the wealth created in the housing market was a powerful tailwind for consumer spending. Now, it’s working a bit in reverse and so we’re seeing that spending is growing less than income and the savings rate is rising. I don’t see any problem in all that.”

Jim O’Sullivan, senior economist at UBS, said consumer spending and the economy will continue to grow, but on the “soft side.”

Consumer spending increased at a 4% clip in the 4th quarter of 2006 and is likely to slip to 2% to 2.5% this year.

Economic Outlook

“Potentially, that would take a point off GDP growth,” O’Sullivan said.

He said he expects economic growth to be slow enough to boost the unemployment rate “from a very low level.”

“The net of that is going to be (Fed) easing,” he said. “We’re calling for 100 basis points (1%) of easing this year.”

Vitner said he doesn’t foresee a rate cut, but if the Fed cuts interest rates, it will be in the second half of the year.

“I think there’s still plenty of room for consumer spending to hold up reasonably well this year,” he said.