Forced Labor: Spending More Than We Earn

Yesterday we learned that non-farm productivity rose 2.2% in the first quarter of this year. Anyone who was working in an office or factory when the last recession hit in 2001 knows what that means—a lot of people have been laid off or had their hours cut back, and the lucky ones who haven’t are filling in the gap left by their colleagues’ absence. Here’s how the Bureau of Labor Statistics explained the current numbers:

Productivity gains were due primarily to declines in hours worked. . . The decrease in hours was the largest since the second quarter of 2003, when they fell 2.1 percent.

A look back to the 2001 – 2003 period reminds us that productivity continued to grow at a healthy pace throughout the recession.

Wages, on a per-hour basis, rose, but not enough to keep up with inflation:

Hourly compensation increased 4.2 percent during the first quarter of 2008 following a 3.7 percent rise in the previous quarter. . . Real hourly compensation, which takes into account changes in consumer prices, decreased 0.1 percent in the first quarter of 2008 after falling 1.3 percent in the fourth quarter of 2007.

On the brighter side, the economy isn’t in recession, according to the latest official GDP calculations. Unemployment insurance claims data released this morning also suggest that, even though hours worked have fallen, businesses aren’t cutting loose their employees in the numbers one would expect in a recession.

So people are working less and earning less than they need to keep up with inflation, but the economy continues to grind on. What gives? Could it be that, just maybe, we’re spending money we don’t have?

The answer is—drum roll, please. . . Yes. Yesterday we also saw the release of the Federal Reserve’s consumer credit statistics for the first quarter of 2008, which show that borrowing continued to grow at an annualized rate of 5.4%. The monthly figures reveal that in March (the last month for which data are available), total consumer credit rose at an annual rate of 7.2%, and revolving credit (credit cards) increased at a yearly rate of 7.9%. It seems that instead of economizing to make ends meet, we just keep on borrowing.

Are we just postponing the inevitable recession, making it worse by loading up on debt that eventually will force people to stop spending? Or are we idling along with just enough (borrowed) fuel to avoid stalling until we get over the hill of damage done by the subprime crisis? If we knew, we’d sink all our money into puts or calls, get our 1000% return, and retire to a villa in Costa Rica. But since we don’t know, the best thing to do is focus on strategies that, when well managed, bring in steady income regardless of market direction.

Comments

[icandoitdon:]

who is surprised that debt keeps rising? why should it not when even the fed....that steady hand of fiscal prudence....recommends that borrowers be forgiven loans they can't afford to pay back. what's the lesson here?

both tax policy and the federal reserve have always penalized savers and rewarded debtors in the name of promoting economic growth through the availability of cheap debt. now they've given debtors a new fix....forgiveness of debt they can't afford to pay. imagine.....can't afford to pay your house mortgage? that's ok....stay in your house....the lenders can just forgive your loan.

what we've come to as a country is an utter embarrasement.

vote every incumbent in every election out. write in your cat or dog...

2008 May 09 05:35 PM

[Mactire:]

Is it possbile that these numbers reflect consumer anticipation of the tax rebate - in other words, the consumers know how much they are getting and when and are going ahead and spending it via credit cards with the intention of paying it off when the check arrives. That might also explain the unanticipated strength of consumer spending in the most recent numbers.

2008 May 10 08:33 AM

[thecadean:]

Credit is expanding ... becouse they will be getting those huge $600 US government financed refund check. Why wait when you consume today.
PS. the new Nissan Super car will be on sale in USA soon. It's just like it's Europeon cousin except.. it comes with WIDER seating... No kidding.

2008 May 10 02:09 PM

[cynic69:]

Dear Mr. Condor Options
The other day Bob Pisani (CNBC) said with great enthusiam that consumer spending had increased so he was sure the rally was real and "the bottom was in". An analyst I follow said "yes Bob but they spent their money on gas and food". Now that crude is over $125 and shooting for the stars I think that Joe six pack is going to have a very difficult time charging those Victoria's Secrets and cheese doodles on his credit card. If you take a gander at the tens of thousands of VIX calls in the "open interest" column I think you will agree there are lots of folks who have already contacted their agents in Costa Rica. The important thing about selecting a villa is to make sure you get a four car garage and a hot tube overlooking the ocean.

2008 May 10 08:35 PM

[Hoot85:]

Of course people are just borrowing more. Our "wal-mart" society doesn't want to give up their luxuries. The person knows that going further in to debt to get out of debt is foolish, but people* are stupid. Watch them bury themselves further into debt, thus delaying the inevitable.

2008 May 10 09:06 PM

[John Pseudonym:]

I know people who are on the verge of bankruptcy and the mind set is "I'm going to borrow and spend every last penny they will give and then bail out."

If this activity/mindset is more than local phenomenon, then we are going to see a huge spike in personal bankruptcies and another whack at the valuation of anyone issuing credit cards as their default rates skyrocket….watch out!

2008 May 11 12:00 AM

[curious cat:]

hey icandoitdon, i routinely get mail for my dog. she is offered credit cards, loans, insurance, whatever. maybe i should start a credit history for her, just in case i need to fall back on something someday.

seriously, i have relatives who anticipated their checks and spent their rent hoping to get their government checks in time. i'm not sure how i could be related to such dimwits but i hesitate to ask my parents at this late date. perhaps, when those genetic tests get a tad cheaper and you can do them at home, i'll borrow their hair brush or swab their glasses and see what gives.

until then, i would just like to say that they moved to california years ago and were relatively sane before they left home. maybe there's something in the water there. maybe we should have everyone in california tested.

2008 May 11 02:14 AM

[bearfund:]

How can you not know? All you have to do is look at the most basic, core fundamentals. America is out of money! Printing more will only devalue the dollar further and exacerbate the problem. You can consume more than you produce for a while by borrowing but there is a limit to how much you can borrow. When you reach that limit you have to quit consuming and start paying, or default. The only way around this is to literally kill your creditors. It doesn't really matter to investors which path America chooses; they all lead to the same place. This is quite possibly the most favourable investment environment any of us will ever experience in our lifetimes. Bear markets founded on hideous structural defects are the best time to make money; while everyone is looking for new excuses and trying to convince themselves that everything will be all right, you build your positions. When the excuses finally run out, you take your profits and walk away - perhaps to that villa.

2008 May 11 04:56 PM