This page has been archived and commenting is disabled.
Guest Post: The Consumption Dysfunction
Submitted by Lance Roberts of Street Talk Advisors
The Consumption Dysfunction
The latest reports from the Bureau of Economic Analysis on economic growth and personal income and spending have, on the surface, appeared to show improvement. Spending is up more than expected and economic growth is clipping along at a 3% annual growth rate in the fourth quarter. That is the good news. As we have discussed in the past the consumer is the key to this whole economic equation. Consumption is 70% of the economy and, as long as the consumer has the ability to consume, the economy can chug along. However, therein lies the dysfunction as well.
The first chart shows GDP on a 10 year rolling percentage change basis. That massive decline in economic growth occurred even as consumption expanded from below 60% to over 70% of the economy. The belief is that expanding consumption should drive stronger economic growth but in reality the strongest economic growth was occurring while spending and debt levels remained at lower ranges and savings rate were high. Savings, as a function leads to productive investment as money is loaned to businesses for expansion or startup, real estate development, or the purchases of equipment. In turn production is increased which leads to higher levels of employment and income. During the 60-70's savings rates ranged between 6% and 15% versus 3.7% today.
Today, the belief is that if the system is flooded with cheaper dollars that the near-term dysfunction of the economy can be fixed through a consumption driven recovery. The problem, however, as we just discussed, is that production must come first. Production is the real source of healthy consumption in the economy. The debt driven consumption of the 80-90's was a slow moving cancer through the economy. Debt has to be serviced which, as debt levels increased without commensurate increases in income, diverted more and more income away from savings and ultimately productive investment.
The problem is that with the media viewing data from only one month, or quarter, to the next the long term trends are being missed.
Incomes On The Decline
In order for consumers to continue to consume at rates high enough to support long term economic growth they need increasing wage growth to offset the effects of inflation over time. This is currently not the case. In fact wages have been stagnant and declining since October of 2010. As of today's latest read - the year over year change in real disposable incomes fell 50% from where it stood in January. Even on a monthly basis real disposable incomes fell in both January and February. Mortgage and debt payments, insurance, utilities, food and auto payments must be met every month and these are just the bare essentials that consume a very large portion of the monthly household budget.
Food & Energy On The Rise - Savings On The Decline
Therein lies the obvious problem. As the rate of increase in income declines as food and energy costs rise - the deficit between income and expenses is made up with either decreased personal savings, increased debt or both. However, with credit tight, limited savings and engaged, either by force or choice, in debt deleveraging - consumers are struggling with higher food and energy prices as they try to maintain their current standard of living.
The sharp drop in the personal savings rate in the month of February, which just hit to lowest level since January of 2008, is indicative of the problem. While personal savings rates could be bled down further to sustain the current level of subpar economic growth - the world today is vastly different than prior to the last two recessions where access to credit and leverage we very easy to obtain.
It is entirely possible, that in the very short term, we could see personal consumption expenditures continue to make some gains even in the face of the obvious headwinds. However, it is important to keep these month to month variations in context with longer term historical trends. Personal consumption is ultimately a function of the income available from which that spending is derived. As such, the current decline in the growth rate of incomes, without the tailwind of easy credit, poses a much greater threat to the current level of anemic economic growth than we have seen in past cycles.
The sustainability of the current economic environment is very questionable and is extremely susceptible to external shocks. This is why Ben Bernanke, and the Federal Reserve, continue to reiterate an accommodative monetary policy stance. While these short term fixes may keep the economy from slipping into a recession in the short term - the long term consequences may be far more damning to the living standards of average Americans.
»
- 8090 reads
- Printer-friendly version
- Send to friend
- advertisements -
I wonder when the acknowledgement that this could be a flat out crack up boom taking place. I am guessing it's a lot higher from here. It's going to be something.
Its all about diminishing returns for the Central Banksters...as soon as they feel the pinch, theyll pull the rug out. Probably already there, seems they just dont know what to do. Its not exactly 2000 anymore, a lot more people are 'woken up' to what they really do. Thanks to places like Zerohedge.
'Personal consumption' is rising....yea all the smart people are taking their cash savings and buying up and storing long term food, and guns.
Spending our way back to prosperity! Why save for tomorrow if Ben can always keep tomorrow one day away?
CONJUNCTION JUNCTION (School House Rock)
You got "AND", "BUT", & "ORE"... They'll get you pretty far...
AND... "Let's print another trillion"
BUT... "Isn't that inflationary"
ORE (gold)... "It'll get you pretty far"
~~~
http://www.youtube.com/watch?v=RPoBE-E8VOc
I read somewhere today the gov is saying the average hh saved $2,800 last month. Please pass me what they're smokin'!
Real income fell, savings fell, beer consumption fell. Car sales on credit rose.
http://confoundedinterest.wordpress.com/2012/03/30/fhas-capital-personal-income-spending-and-savings-all-aboard-the-debt-train/
BEER consumption fell???
Isn't that the sign of the apocalypse!??
"the consumer is the key to this whole economic equation."
"Production is the real source of healthy consumption in the economy"
These assumptions may have applied to something in the real world at one time, but to say the consumer is the key in this economic situation is laughable.
The status of the consumer in the US is approaching the dead carcass in the road stage. And by "Production" are we not talking about 3rd world countries where most production takes place today?
This whole article is based on faulty assumptions and does not address the real causes of the current financial crisis.
The conclusion of an illiterate.
The point is you need to produce DISPLACING the 3rd world slave-nations & stop being a consumerist society - or be destroyed.
The CURRENT financial crisis short-term is massive fraud. The LARGER crisis is lack of production, forcing the lesser-able but less-honest individuals & firms to seek parasitic fraud consumption of the body from the inside.
This is a kind of cancer & some serious chemo-therapy is needed.
"....- the long term consequences may be far more damning to the living standards of average Americans. "
Great, we just have to avoid being an average American.
Exactly.
Gots to breakout of the 'average' cycle.
Gotta get outta the rut, that's all.
4 week avg WLEI hangs by a thread at near recession levels after booming 25% higher in 2008. It now has declined to 0 levels near the tipping point.
Please elaborate, I don't see any "WLEI" ticker on my screens.
WLEI has been increasing steadily this year, from a very low negative number. It will probably be in positive territory next week, and causing that guy from ECRI with the unpronounceable name to rethink his recession call.
i am trying to save so i outfitted my apartment with stuff from rent-a-center
The savings rate appears low because people are withdrawing cash from the banks and keeping it at home or "investing" it in preps.
Once we relight that housing bubble - look out baby DOW 20,000 here we come!
giggity - oh yeaaaaaa
20,000 dow
http://flic.kr/p/btrSQu
$178/barrel oil!
Take care of any medical needs while they are still available.
with the hollowing out of home equity, spending by older and near-retired people will be much lower than in the past. as such growth will remain anemic and gdp/macroecon data points will remain 'subpar' and the economy (and employment) will be more suceptible to any issues (oil shocks other exogenous events) than normal, and recovery from such events more difficutl and expensive than usual.
this boils down to market p/e's, going forward will be much lower. a 25% mkt delcine will equal low teens, sub-ten p/es for a number of years. combined with low interest rates....investment income will have to come from dividends, hopefully bought at much lower prices than today