When Will Consumer Spending Support Recovery?

From the 5-Min. Forecast (here) comes the following graphic:

With consumption constituting around 70% of the economy in recent years, a contraction of nearly 10% in real personal income less transfer payments is not supportive of economic growth.

Increasing levels of debt are not helping support consumption either. Total credit of commercial banks continues to decline at an historic rate. See the following two graphs:

The consumer does not appear to be supporting the economy. It has been estimated that government spending accounted for a 4% increase in third quarter GDP. Since the preliminary GDP growth estimate is 3.5%, that means the private economy was still contracting as of the third quarter.

Most economists do not think that consumer credit growth is likely in the coming months. Overextended household are still trying to dig out from past extravagance. Only increased employment can be looked to for an increase in consumer spending. There are those that are predicting that could occur by January (here). If employment could increase in 2010 by a million it could be enough to turn the consumer spending curve in the first graph up significantly. A rough estimate is that about 1/3 of the drop in personal income minus transfer payments occurred during the time that the last one million jobs were lost.

It may not be appropriate to assume that consumer spending will return with increasing employment as fast as it fell with decreasing employment, but it definitely should turn up.

Of course, this discussion is all academic if there is a double dip recession. The overhangs of potential home mortgage, commercial real estate and personal credit defaults, plus the failure to address the teetering asset structures of the banks, can not allow the double dip scenario to be dismissed.

Our economy has learned to live by the consumer and, if it dies now, it will die by the consumer. Not a permanent death, in my opinion, but hopefully an experience that, if it occurs, will cause us to see that famous bright light and hear the voices of truth from the great beyond.

Added note: Michael Panzer has two charts (here) that relate to the debt over burden of the consumer.

Comments

[Dave Wrixon:]

It seems to me the question is backwards. I would more readily ask:

"When will recovery support consumer spending?"

Consumer spending is essentially the problem that got everyone into this mess. More spending is not the solution. We have to work to create new means of wealth generation. Consumption does just that it consumes wealth. Sure it is also a useful means of distributing wealth, but create it it does not.

Nov 04 04:48 AM

[User 16123:]

Dave, Dave, Dave,,, Consumer spending is NOT the problem. Wall Street and our political parties got us into this mess.[PERIOD]
Please do some hard thinking and problem determination skill assessment before simply quoting the main stream media.


On Nov 04 04:48 AM Dave Wrixon wrote:

> It seems to me the question is backwards. I would more readily ask:
>
>
> "When will recovery support consumer spending?"
>
> Consumer spending is essentially the problem that got everyone into
> this mess. More spending is not the solution. We have to work to
> create new means of wealth generation. Consumption does just that
> it consumes wealth. Sure it is also a useful means of distributing
> wealth, but create it it does not.

Nov 04 08:25 AM

[optionsgirl:]

Consumer spending depends on jobs growth.

Nov 04 10:22 AM

[vamm:]

harrumph.

some history that i'd love to see is the pre thatcher/reagan/deng years.

my quick'n'dirty take on exactly how the darkness fell on us (from which the here mentioned light may hopefully deliver us) is that big companies got good at riding the middle classes of the world (into the dirt and beyond, it now appears), ergo the mass transfer of wealth to what marxists might once have called the bosses and captains of industry. the architects of the epoch in which that was able to happen heavily relied for their legitimacy (=our more or less common assent) on the idea that they were our great deliverers, from what was happening pre thatcher/reagan/deng.

it's exactly this chapter/s of history, rather than any smoot-hawley/japanese bubble period which, to my mind, is becoming the most relevant to our current problems.

sorry about the syntax, by the way.

Nov 04 01:49 PM

[sdfsdf:]

Well Dave is not exactly wrong you know. The answer is to save some and consume within our means [PERIOD]. Also to consume at the expense of one's own economy is also wrong that is consuming local goods first and then foreign goods.


On Nov 04 08:25 AM User 16123 wrote:

> Dave, Dave, Dave,,, Consumer spending is NOT the problem. Wall
> Street and our political parties got us into this mess.[PERIOD]<br/&g...
> do some hard thinking and problem determination skill assessment
> before simply quoting the main stream media.

Nov 04 04:04 PM

[David Van K...:]

The economy is a circle; money "circulates." So both formulations are correct. It is true to say the economy will grow if/when consumer spending resumes its growth. AND it is also true to observe that the ability of consumer spending to grow depends on a healthy economy. The link between the two is jobs. It could also be credit, but that's been maxed out and is currently contracting, as it must for a long-term sustainable recovery. So the key right now = jobs.

In an ideal economic period (let's define that as ~4%-5% steady and sustainable annual growth), both consumer spending and the general economy grow together, reinforcing each other. In a recession--which is by definition a contraction in economic activity--both negatively reinforce each other.

Which comes first, the chicken or the egg? They both work together. Both have been declining, but at a slowing rate. On some specific fronts, decline has stopped and growth has returned. It is wrong to over-emphasize one or the other. Both--increasing consumer spending and general economic growth--are necessary for the recession to end. To put too much emphasis on one or the other is to miss the latticework of factors that must stop declining and begin growing in order to bring an end to the recession.

Nov 04 05:15 PM

[Steven Hansen:]

jobs are a social problem, but as hard as it is for me to admit it - i do not think job growth is restraining recovery.

what is restraining is a complete lack of a driver. america needs a mission and a direction. a greening of america will not drive economic growth.

we tend to believe a driver will appear. i am afraid this is old school logic. the government must create a driver.

Nov 04 09:45 PM

[Dave Wrixon:]

I don't doubt that the role of the consumer is important, but it has over emphasized for the best part of a generation. As Steven says we need a driver. Jobs won't just appear out of thin air and neither will consumer spending. That spending in the currently over indebted economy does need jobs and that job creation depends on an external driver. What is need is increased capital investment and higher exports. That will require America to produce more for less until at least part of the debt is repaid. It probably means higher interest rates and near zero wage growth in return for higher productivity. It also requires a weaker dollar to make American goods competitive without deflation. It is going to be a difficult trick to pull, but at some point somebody has to decide to stop making the problem even more intractable.

Nov 05 01:38 PM