Consumer Spending vs. Consumer Savings

Excerpt from Raymond James Economist Dr. Scott Brown's latest economic commentary:

On Wednesday, the government will release its initial look at real GDP growth for the first quarter. The headline figure is expected to be poor, but not as bad as the -6.3% annual rate reported in the final estimate for 4Q08. While the financial markets will be focused on the headline growth figure, the meat is the details. The components tell the economic story of the first quarter. However, we should be able to glean something about where we’re heading in the near term. The longer-term outlook; which includes further financial strains, a possible bottom in the second half, and a very gradual recovery; remains in place.

Adjusted for inflation, consumer spending fell at a 3.8% annual rate in 3Q08 and at a 4.3% pace in 4Q08. In contrast, the data for January and February suggest that consumer spending may post a positive gain in 1Q09 (the result will depend very little on what happened in March, more so on possible revisions to January and February). What supported consumer spending in 1Q09? The drop in gasoline prices from last summer acted like a 2% cut in the income tax for those still working. However, gasoline prices have trended higher since the end of last year – so there won’t be ongoing support for consumer spending growth from lower gasoline prices. Additionally, consumer attitudes shifted from outright fear to general caution.

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The savings rate rose to a little over 4% in the first two months of the quarter. If it stabilizes in the 4% to 5% range, consumer spending will likely stabilize as well. However, if the savings rate were to rise further, say to 8% to 10%, the current economic downturn will be more severe and longer-lasting.

Comments

[silentobserver:]

Regarding the future development of the savings rate all has been said:

"The longer-term outlook; which includes further financial strains, a possible bottom in the second half, and a very gradual recovery; remains in place."

The question rather is: Is it the cause or its result?

Apr 28 11:15 AM

[Vox Rationalis:]

Keynes, anyone? Keynesian argued that government spending should be anti-cyclical. That is, during recessions, government spending increases to make up for aggregate demand lost due to reduced consumer and business spending. The flip-side (obliterated during the 1980s) is that during expansions the government must do no worse than break even, and ideally will operate at a surplus.

Apr 28 05:43 PM

[conceptwizard:]

People are changing the way they look at life. They have tried it wall streets way. Now they are going to do whats best for them, the safest thing they can do, perserve what they have left. The savings rate will increase to levels not seen since the last 2 Generations. Granpa would say "I told ya so", don't buy what you cant afford. Once burned twice shy.

Apr 28 09:02 PM