March Personal Consumption Expenditures (PCE) released this past week suggest that the consumer is returning to the consumption trough. Many pundits are convinced a consumer driven recovery is beginning to grab hold. Per Christopher S. Rupkey, Chief Financial Economist for the Bank of Tokyo - Mitsubishi UFJ:
But the real surprise was consumer spending, which was stronger than our own estimates and hopes, rising 2.9% and thus contributed 2.0 percentage points to GDP. Consumption in February was only running about 1.6% on a rolling 3-month average basis, but the retail sales data for March released on April 16 was stronger with upward revisions and now real consumption is up close to normal at 2.9%. During the housing bubble years consumer spending was 3.3%, 2.8%, and 3.2% in 2004-06, respectively. It is important to note that it was not just car purchases in the first quarter; consumers also purchased more nondurable goods and services. Household heating services was depressed in Q4 2011 due to the warm winter weather. Consumer spending looks to be broadening out from just car & light truck sales which have moved up a lot already from 12.5 million in Q3 2011 to 14.5 million in Q1 2012. We expect consumer spending to continue to rise this year, close to a 3.0% rate, as it is supported by better consumer sentiment readings and an improved outlook for the labor market as shown by the Conference Board survey saying fewer consumers think jobs are hard to get.
The "recovery", until the end of 2011, was driven primarily by goods production with the consumer weakly playing a supporting role. The major driver in 1Q2012 GDP was the consumer.
The question on the table: Is consumption here to stay? In the Econintersect analysis of PCE, the following chart was included, based on the BEA's annualized monthly estimates. (Stated differently, these are numbers the BEA analytically guesses the annual consumption would be if all months in the year were like the current month.)
From this graph, it appears that consumption is trending up using a 3 month rolling average to smooth out this very noisy index. This graph tends to support the suggestion that consumption is strengthening. From my vantage point, I am not a lover of seasonally adjusted data as the New Normal is rife with unexplainable data oscillations that never occurred before the recession of 2007. Seasonal adjustments work well when your data series is consistent every year.
Historical consistency is not real world in our New Normal. Year-over-year trends allow a better understanding of the dynamics.
In the above graphic, the "less good" consumer growth downtrend is clearly showing. One might argue that the less good trend is subsiding, but it is impossible to argue based on the current data that consumer consumption's rate of growth is improving. What has happened is that the other green shoots have yellowed, and only consumer consumption remains with any sort of solid green.
Debate about what lies ahead is fodder for the pundits. It is possible to identify many headwinds, and a few tailwinds. My usual argument is that 2% annual economic growth is almost no growth, but the USA economy is in an unusual position of a 4+ year depression which does not carry much room for additional contraction. In real terms, per capita spending (as measured by GDP) remains 2% below January 2008 levels.
My opinion (not fact or fact based analysis) is that consumer spending growth will stabilize around 2% per year, and can grow faster if the economy can consistently grow jobs at over 2 million per year. Spending is relative to people having jobs. For me, it always has been and always will be about jobs.
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