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Where Is The Money Coming From To Fuel Spending?
From The Daily Capitalist
It is a curious phenomenon that consumers are increasing spending in light of high unemployment and declining wages. How can that be? Have consumers just decided that the recession is over and life will be just like it was before?
Let's get the facts on the table regarding wealth, savings, earnings, and spending:
- Personal Consumption Expenditures increased 0.3% in February. Retailers had a good month.
- Unemployment (U-3) remains high at 9.7% nationally. Jobless claims keep rising: 24 states had rising rates, 9 had no change, and 17 had declining rates in last Friday's report. Note that the Washington DC corridor had wage gains.
- Private jobs are declining (-23,000) per the ADP report which is at odds with the BLS report.
- Wages keep declining. Real average hourly earnings for all employees fell 0.2 % from February to March. There was a 0.3-% increase in the average work week offsetting the decrease in real average hourly earnings.
- We also know that consumer credit continues to contract, a -4.0% decline YoY.
- About 51% of American households own stock, which which represents 36% of all equity holdings and 62% of all mutual fund holdings (2008). The rise in the stock market does create a wealth effect which makes people feel financially more secure. They were massive net sellers in 2008 (-55%).
- But, household net worth was up $2.8 trillion over 2008, about 5.4%, but it is still down about $11 trillion from the 2007 peak and now below 2005. The biggest drag was declining real estate values and declining equity in homes.
- Household debt measured by debt service payments as a percent of disposable personal income has declined from a peak of almost 14% to about 12.6%.
- As of Q4, household equity was 43.6% up from the record low of 40.8% in 2008, but below post-WWII levels. Part of the increase was due to a reduction in mortgage debt (defaults and pay-downs) not rising home prices.
- Foreclosure filings in the U.S. rose 16% YoY in Q1, and homes seized by lenders rose 35% YoY according to the latest RealtyTrac report. Auctions increased 21% YoY. They expect 1 million seizures and 4 million foreclosure filings this year.
- The Reuters/University of Michigan preliminary consumer confidence index of dropped to 69.5 in April from 73.6 in March.
- Personal savings has declined to about 3.2% down from a high of 6.4% in May, 2009. But savings has been declining since the early 1980s (about 12% then). Savings declined to an all-time low of less than 2% during the Dot Bomb crash.
To put this data into perspective, consumers are fearful about the future, unemployment remains very high, wages are declining and there is no way wages will increase any time soon, the home ATM is closed, consumers and small businesses can't get credit, and foreclosures are on the rise. While the stock market has gone up, household net worth is now back to pre-2005 levels.
So what is driving spending? Two things.
First is that consumers are drawing down savings to spend. Flat income growth caused consumers to tap into their savings to finance purchases of goods and services. If savings are a main motivation of consumers, especially with the wealthiest consumers (Boomers of retirement age), and since wages are flat to declining, then a reduction in savings to fund consumer purchases is not a good thing for the economy. It means that as soon as consumers feel they have sufficient income to continue to save, they will do so, and PCE (personal consumption expenditures) will remain flat for an extended period of time. The fact that they are dipping into savings is not healthy organic growth of PCE.
Second is the cash that is available to those consumers who have ceased paying their mortgage. Since foreclosures are at record levels, and since home owners understand there is no reason to pay their mortgage if they are going to lose their house, this frees up a significant amount of cash for PCE. David Rosenberg of Gluskin Sheff has estimated the effect to be $190 billion over time. While we can argue about his numbers, it doesn't represent a permanent source of income to fuel spending.
You may conclude that these factors are transitory, and that since long term economic trends favor saving over spending, PCE is systemically weak.
Further it appears that wage growth will remain stagnant. With such high unemployment there will be no pressure on employers to raise wages to attract workers. The economy needs to create 12 million jobs to recover to pre-recession levels. This may take three to five years depending on whom you listen to.
It appears that the economy has permanently changed and that consumer spending will not reach its former 70% share of GDP. If it does then that will be because GDP is shrinking in response to deflationary pressures, not economic growth.
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Media is an integral part of the confidence game.
Its funny you said that, Because thats all I'm hearing now days. I was at work yesterday, and someone said yeah everything is really turning around you can just see it. Of course I couldn't let him go on, so I said oh really where? He replied just look at the newpapers and News, Everyone is reporting recovery, record profits.... I was just in Shock.
But just goes to show ya, people don't have a clue and listen to everything they are told.
http://www.dailyjobcuts.com
and shadow stats both are good at getting some real figures.
I would highly recommend you educate yourself, and your co-worker, as to who Edward Bernays was. A good synopsis can be found in Adam Curtis' documentary "The Century of the Self." You will be amazed, and probably disgusted, by what you find.
Here's Part 1 - http://www.veoh.com/collection/powermongering/watch/v331913aKp43GXW
Keep in mind that Bernays went on to work for the CIA. Marketers and advertisers have this stuff down to a science, quite literally. It is no mistake that electoral campaigns now resemble the sale of Pepsi or Coke. It's quite brilliant actually. The system is now so ingrained into people that it actually perpetuates itself. You don't even really need an "overseer." As the facade comes down, some people will work VERY HARD to pretend that it is not so (think Cypher from The Matrix). Cognitive dissonance is a bitch (no, not our great contibutor CD). Most recently, it was perfectly exhibited by the gunner on the Apache helicopter in Wikileaks' "collateral murder" video. When he found out that children were aboard the vehicle he had just decimated, he simply stated "[w]ell it's their fault for bringing kids into a battle," to which is pilot replied "that's right." And just like that, his conscience was cleared. Lather, rinse, repeat.
+1
What - after years and years of happy spending on "blind" credit advances, we should expect the average consumer to learn a lesson from all this? Do they really think anything has changed for the long run? or are they all just waiting out this "temporary discomfort"?
How many alcoholics quit drinking after a car crash?
--rQ
I'm with you Space Monkey. We are a nation of consumers, plain and simple. The financial crisis / recession temporarily pushed people toward frugality, but their innate behavioral desire to consume shiny objects will (is) pull them back to the dark side.
Your analysis seems to be right on. Aren't there any independent studies on consumer patters, habits, and expenditure sources to provide supporting evidence of what you are saying?
It seems so irrational that consumers would be cashing in savings to spend. How can anyone over the age of 40, looking at what's happening around him/her not be scared into savings?
Is there evidence of IRA (401k) draw downs? Does 0% interest rate affect the way people think about money?
I always wondered where people got money to buy the McMansion and the second BMW ... now I wonder what these people are doing to survive?
This information is available in the quarterly Flow of Funds report put out by the Fed. Also the Fed (FRED at St. Louis Fed) has spending and savings charts. I think I provided evidence of everything I said in the data portion of the article. The only thing that's hard to put a handle on is the cash from nonpayment of mortgages.
bear, consumer metrics work is real-time durable goods purchases data captured through internet transactions. their work clearly shows we are already in a shallow recession again as far as durable goods consumer purchases are concerned, directly refuting the government retail sales data.
we need to have the sales tax receipt numbers for March/April before we can believe the retail sales (which suffers from survivor bias) data from the government.
http://www.consumerindexes.com/
Well, pulling money from your savings and buying physical gold/silver would count as increased spending, so some of it may be that. Add in purchases of income properties from the pile of foreclosed homes, and the furniture/paint/etc needed to turn that into a rental property and a lot of the spending could be more accurately seen as investing.
I'd like to see the breakdown of where and what this spending is on before I draw any conclusions from this trend.
First is that consumers are drawing down savings to spend.
And, I hope to start doing that soon. It's called 'retirement', and the boomers are retiring. With IRAs and 401IKs, I expect to be spending without looking like I'm saving. As long as the principal grows, I count it as saving even if the silly economists don't.
How safe actually are savings? Not only does the combination of low interest and ongoing inflation (of many everyday necessities anyway) eat away at savings, but also many fear that government is casting covetous eyes on 401-k and other savings funds.
Speaking personally, I would rather invest in durables that will be useful no matter how the future unfolds than take the chance that I will be forced to accept a small annuity rather than have personal control over my savings.
No doubt others have the same outlook. It is not only "profligacy" at work here!
This is how the Fed justifies inflation, people sense that they can get more for their dollar today, therefore they spend today. It's banana republic economics.