We are trying to clear up the contradictory picture created by the abundance of numbers published for better understanding the USA consumption dynamics.
Prior to analyzing the dynamics we must note that the cost of living in the US is growing, the Americans are spending more and more on necessaries. If you look at the share of food and electricity spendings, it was 17% of total spendings of the Americans in 2000 while it exceeded 22% at the end of 2011. Therefore, the growth of income is lagging behind the growth of food and das prices. This is especially true regarding the past year when real income of the population decreased (which will be elaborated below) while gas and food prices were high.
Another dangerous issue is that today the growth of inflation-cleared income of the US population still remains below the peak level of 2008 while the nominally announced 2011 income growth is in many respects the result of State subsidies that have already started to diminish in their amount and quite possibly will continue to decrease in the future.
The households' spendings growth is the basics of the American Economy. In the early 80's the consumption share in economy was a little over 60%, while it is about 70% today. That is, the consumerism policy supported by low interest rates has been nourishing the economy growth for decades.
Consequently, since the early 80's the debt size is steadily growing in relation to the households' income. By the end of 2011 total debt of households, corporations and states in relation to the GDP was about 350% compared to the slightly over 60& on the 80's. The process of deleverage has stated since 2009, which means that the households cover their debts or else they are forced to in a case of inability to pay. Today with the beginning of deleverage, long-term future economic growth is highly doubtful as well as the ability to maintain growth tempo giving out credits. The salary growth tempo as well as that of the consumption growth in the US has been following the down-fall dynamics since the 80's of the 20th century.
Since the early 80's the consumption growth was accompanied by the drop of savings rate in the US economy. By the end of 2011 the official savings rate is 3.5% while it was over 10% in the 80's. Nominal consumption growth at the expense of savings rate drop is especially up-to date in 2011 when as of December 2011 the economy savings rate was 5.19%.
It does not look so bad in the first graph: the consumption has been growing 3.5-4.5% in relation to the previous year since the end 2009. The inflation games are played to evaluate real indexes of growth. Which inflation is better to account for the real growth? Is it the CPI? Adjusted CPI or PPI? The second graph shows the acceleration of all the inflation kinds in 2011. We consider CPI to be the best index among the rest. Adjusted CPI, excluding food and electricity inflation due to their volatility is used by the US Government as an index for elaborating the monetary policy. AT the same time, the share of food and electricity expenses in the total expenses of the Americans has a steady growth tendency which we have mentioned above. It is volatile in the short-term while in the long run people tend to spend more on commodities leaving less for the discretionary income in their income structure.
Comparing the Consumption graph to the CPI Inflation graph it is easy to draw the conclusion: in 2011 the real consumption growth was lower than that of 2010. Therefore, seeming like the nominal stable consumption growth, the real growth is decreasing in 2011.
The income growth picture is even more interesting: the graph shows that the income growth tempo has decelerated since March 2011. Moreover, the 2011 real population's income growth, using CPI as inflation index, is negative.
The question is: how can income growth drop while the expenses growth be positive? Let's analyze two answers: either credit increases or savings decrease.
Personal savings were 599 B USD in January 2011 and 401 B USD in November 2011. That is 198 M USD drop. Consumer credit was 2409B USD in January 2011, while it was 2477 B USD in November 2011. That is 68 B USD growth. Therefore, the real consumption growth in the US in 2011 was not caused by growth of income, but by the decrease in savings and consumption credit growth.
Other indexes for demand dynamics in the economy are the situation within the non-manufacturing sphere and the consumers' mood.
The situation within the non-manufacturing sphere has got worse by the end of 2011 compared to the beginning. The ISM non-manufacturing Index is evaluated basing upon the poll of 375 companies from construction, agriculture, mining, transportation, communication, trading industries. The index consists of four equal components: business activity, new orders, occupancy, the suppliers' performance. The index value is above 50 stands for growth in the non-manufacturing sphere, while the value below 50 means the drop in the sector. The non-manufacturing sector dynamics during 2011 is revealed in the drop of the index value from 59.4 in January to 52.6 in December.
Consumer Confidence and Consumer Sentiment Indexes hit the bottom in August-October 2011, by the end of the year approaching but still not reaching the January numbers.
The graphs below represent retail sales, auto sales (in percentage and items), ICSC-Goldman Store Sales and Redbook growth weekly data. Official data states that the nominal retail and auto sales growth exceeds the total expenses growth of the Americans. Analyzing the population's expenses growth, retail sales and similar indexes, it is crucial to take into account the population growth dynamics. Taking note of the 5% goods prices dynamics by the end of 2011, the real retail sales growth per capita almost equals zero in 2011. Above that, the real retail sales volumes still remains below the pre-crisis level in 2011. ICSC-Goldman Store Sales weekly data, representing the major retail chains' growth (about 10% of the total retail sales), shows quite a modest growth of 2-4% during the year. Redbook, a more volatile weekly index, representing the sales growth of typical discount and department stores, behaves the same way. This index is evaluated "in a special way": for instance, the first week data is compared to the average value if the previous month, instead of the value of same week of the month.
Therefore, in 2011 real income of the US population decreased for about 1% due to high inflation, while the income of the Americans without the State subsidies follows a stagnation dynamics. The real consumption growth in 2011 was caused by the decrease in savings as well as credit growth. These factors are not fundamental for long-term consumption growth in the current economic situation. I would say that the US economy is in a difficult but stable condition. As a result, we still favor international companies operating not only on the territory of the USA and Europe, but actively developing their business in Asia and Latin America.
This article contains the opinions of the author which is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
Performance data shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown.