Another Month, Another Misreported Consumer Spending Number

In absurd/misleading headline news there is this headline from the AP: “Soaring prices for food, gas push consumer spending higher." The problem with this headline is that it tries to put a positive spin on a bad situation, by making it sound as if inflation causing consumers to spend more and receive the same or fewer goods is a good thing.

From the Associated Press:

WASHINGTON - Soaring prices for food, gas and other everyday needs pushed consumer spending to a faster pace than expected in March.

The Commerce Department reported Thursday that consumer spending was up 0.4 percent, double the increase that economists had forecast.

However, once inflation was removed, spending edged up a much slower 0.1 percent. The March figures represent the fourth straight lackluster performance as consumers have been battered by record gasoline prices, a deep slump in housing and rising job layoffs.

The other problem here is that the Fed grossly understates the inflation that we as consumers feel when we fill up our tanks, buy groceries, pay for health insurance and fund the rest of our day to day expenses. Meaning if you consider the real inflation consumers are dealing with consumer spending contracted last month, just like it has for the past several months.

Arguments around how consumers should manage their money aside, the only positive consumer spending number is one that indicates that Americans are actually buying more goods not the same or less. Unless you sell oil or agricultural commodities, the consumer spending number is nothing to celebrate, as you’re earning fewer profits per dollar you take in and/or receiving fewer goods per dollar you spend. In truth, there needs to be some measure of efficiency in order to make these numbers valid, something where an increase in spending indicates consumers are purchasing more goods and businesses earning more profits.

Finally, until the Fed decides to report true inflation and the Commerce Department than uses that number to adjust its normally nominally reported numbers, the consumer spending data we receive will be near worthless/need to be taken with a grain of salt.

Sources:

The Associated Press: “Soaring prices for food, gas push consumer spending higher” – Martin Crutsinger, May 1, 2008.

Comments

[Skjellifetti]

Maybe I'm atypical, but the increased cost of gasoline has barely made a blip in our budget. It has been something on the order of an extra $15/mo. We have been buying organic food from mainstream groceries for the past couple of years and the costs are actually starting to drop. I suspect that this is because there are more farmers entering the organic market. From my perspective, the CPI numbers are pretty accurate.

And that is the problem with articles like this. Since there is no such thing as a typical consumer, it is very difficult to create a market basket of goods and prices that can represent the price changes that are affecting all consumers. Superficial articles like this one that make claims about "we consumers" should be ignored.

[bearfund]

Actually the only positive number is one showing Americans spending MUCH LESS than they have in the past. Most Americans spend more than they earn and have been led by the Fed and other banks to believe that this can continue indefinitely. The sooner they learn for themselves that this is not in fact true, the better off everyone will be. I figure consumption needs to fall 10-15% and remain at similar levels for 20 years for the American economy to be healthy again.