Decline in Consumption: Recognition or Necessity?

The amount of disposable income that Americans have had available to spend has continued to increase since last August, while the amount they have actually spent has been dropping. This suggests that the fundamental cause of low consumption spending is consumers’ recognition that their homes and businesses are worth less. It also suggests that consumer spending may be headed even lower.

The chart below graphs monthly personal disposable income and consumption expenditure since July 2008, both adjusted for inflation. The former has been rising since August and the latter falling most of the months since June.

Click to enlarge:

Personal consumption expenditure measures the amount spent by households on goods and services. It comprises about 70 percent of total spending in the economy. Thus, it is important to understand why consumption spending has fallen so much in the last six months.

Personal disposable income measures the income that households actually receive (net of taxes) from their jobs, from dividends and net interest on investments, and from government transfers like Social Security. It is income households have available to spend or save.

If severe enough, reductions in personal income would require households to spend less on goods and services. But for several reasons, personal income has actually been rising despite the recession: Millions of people (so far) remain employed and paid well; corporations with slack earnings continue to pay their dividend; unemployment insurance payments have been rising; and Social Security payments were increased.
Many people have reduced their purchases of goods and services in spite of rising disposable incomes because they recognize that their homes are worth less, any shares of a business they own are worth less (despite the business’s continued dividend), and those still employed are concerned that they may be part of the next layoff.

The year 2008 finished with a lot of bad news that legitimized these concerns. But even with such a modest starting point, 2009 has had plenty of bad news of its own, including a 20 percent (or more) stock market decline and a further sharp reduction in employer payrolls. It seems that consumers could legitimately cut their spending yet again in February, March and April.

Comments

[GreenGuy:]

I think the biggest reason consumption is down is because people fear for their jobs -- even if they survive a layoff, they could see their income cut as a concession to the company.

Mar 13 10:08 AM

[kelm:]

This doesn't pass the giggle test.

Think about it...How is it that we have some millions of additional unemployed since August and the amount Americans have available to spend has increased? There is something fundamental in the data that is not stated or understood.

If the survey is of working families then your argument may be credible (as we would have excluded the unemployed and perhaps that is a larger percentage of lower age earners than higher wage earners) but as it stands this analysis is incomplete.

Mar 13 10:33 AM