Reader John O passed along this Bloomberg chart du jour (click to enlarge) which effectively argues that the consumer has gone down so far she has nowhere to go but up:
The related article argues:
….these so-called discretionary goods and services accounted for a smaller percentage of consumer outlays last quarter than at any other time since 1959. The proportion dropped about 0.3 percentage point, the sixth decline in seven quarters, to 15.6 percent.
The chart is similar to one created by Steven Wieting, Citigroup’s managing director of economic and market analysis, that Levkovich cited yesterday in a report. Both were based on spending figures compiled by the Commerce Department.
Consumer behavior is likely to revert to “the ‘Old’ Normal” — spending more closely tied to income, rather than borrowing — that prevailed during the 1950s through the 1970s, Levkovich wrote. “Some reasonable bounce is to be expected” in discretionary spending as that occurs, the report said.
“The frivolous consumer will not turn into the frugal,” he wrote, adding that pent-up demand will lead to production and employment gains.
Houses, cars and other durable goods, or items made to last more than three years, are the biggest category of discretionary spending as defined by Citigroup. The firm also included outlays on games, sports supplies, flowers, newspapers and magazines, hotel rooms, recreation and non-U.S. travel.
The “old normal” reference contrasts with the “new normal” that Pacific Investment Management Co., or Pimco, foresees. The firm expects relatively slow economic growth for the next three to five years as households and businesses retrench.
If one wanted to be a devil’s advocate, it isn’t hard. Comparing this downturn to past post war busts seems questionable. Those recessions, save our current bust, were the result of imbalances in the real economy. Inventory swings explain more than 100% of the change in GDP. By contrast, this one is the result of a 20 year debt party in the US, with the manic phase starting in 1999. This is a different sort of beast, and expecting old patterns to reassert themselves quickly is a bit of a stretch.
14 comments
Comments are closed.
I am starting to wonder if we are all in the left field with this. Past downturns were "revived" with monetary and fiscal stimuli.
This downturn is indeed a very different beast, that I agree with. But there was breathing room left for "one last shot", which is obviously being used!
All this unprecedented monetary and fiscal boosting WILL undoubtedly have a real effect and may well revive the consumer one last time, which will confirm the believers in eternal stimulus that contercyclical policies of epic proportions are warranted, no matter the format they take. The problem is that the next one may indeed be the big one, if the private sector doesn't deleverage to sane levels.
We will enter the next downturn in a ZIRP world and stratospheric govt debt to GDP levels around the world.
My concern is about the next downturn more than about this one, no matter when it comes, probably circa 2012, when all the ammo will have been spent on the current battle.
The consumer may well return to past "normal" levels this time, but again on the back of more debt…
The Wall Street "normal" seems to have come back; could the consumer be far behind?
Real wages have declined since 1973. Without credit, I'll need to send my kids to the factory before I can spend in the style to which I used to be accustomed.
PascalMtl makes a good point. I too wonder if the old habits have been expunged. The frenzy in parts of the housing market seem to imply that we may not have learned the proper lessons yet.
Perhaps of more importance, the political class seems to desperately want a return to the "old normal" and is inclined to pull the necessary levers to make that happen regardless of the risk.
Yeah, and I'm sure Japan expected to get right back to "normal" as well. You'd think, at this point, people would be done saying something can't happen because it never has before.
The big missing piece is the home ATM, which accounted for about 8 percent of disposable income before the bubble burst.
desire to consume and capacity to consume ain't the same thing.
and the thing about this downturn is that the two are causing a positive feedback loop. as spending capacity falls, even wealthy people are avoiding conspicuous consumption. hell even blankfein told his little GS parasites not to buy crap.
at some point this will change, probably with some new technological innovation (PCs in the early 90's, cellphones in the late 90's, smartphones today)
i guess we are seeing this now with the "green" revolution with cash for clunkers and cash for dishwashers, but the green stuff seems like a fashion statement or fad.
even still, that helps china more than us.
there is so much excess capacity in all things retail (buildings, debt, unemployed people selling their junk on craigslist to pay bills, etc.) i don't think the eventual rebound in discretionary spending will have the same multiplier as in the past.
it's kinda sad this is the only rabbit we have in our hat.
This is big question, certainly we know where Bernanke, Paulson, Geithner, Summers et al line up.
If we look at Japan, which is similar, though no way identical, for example, the whole planet didnt go South in the 90s, just Japan.
But say everything done to this point — all the money, mark-to-happy, etc–leaves economy over next few years at best flat? Grow 2% a quarter here, down 1% there, over time — flat.
What does that mean for everything?
I clicked on the BEA link in the Bloomberg article, and it seems the data this report is based upon is not online.
My question is where medical expenses come in. John Authers of the FT ran a chart not long ago that showed "consumer spending" as percent of GDP rising steadily over the past 20 years or so, but essentially flat after stripping out medical spending.
Business Week's Mike Mandel picked up on this issue recently too, see Consumer Spending is *Not* 70% of GDP.
"… First, the category of “personal consumption expenditures” includes pretty much all of the $2.5 trillion healthcare spending, including the roughly half which comes via government. When Medicare writes a check for your mom’s knee replacement, that gets counted as consumer spending in the GDP stats … "
"… At a time when we are wrangling over health care reform, it’s misleading to say that “consumer spending is 70% of GDP”, when what we really mean is that “consumer spending plus government health care spending is 70% of GDP” …"
Still it's a fascinating chart. I wish someone would annotate some of the peaks and troughs. Is that spike in the early '70s the first oil crisis? The Volker recession in the early 80s really was a bitch. The rise during the Clinton years as the federal budget went into surplus seems unbelievable, as does the sharpness of the drop during the Bush years despite tax cuts and a couple of wars. Maybe coke & hookers aren't considered discretionary south of the 90s?
OK, so discretionary spending may grow from 16% GDP to 18%, the historical norm. Meanwhile, non-discretionary spending (50% GDP) will plunge to 30% to get to the historical norm.
End result: total spending makes GDP plunge only by 18%.
How can anybody spin these spending data to make them seem positive?
Non-discretionary spending dropped last quarter, did it not? People are not spending because they don't have the money. Despite the champagne baths apparently going on around CNBC, over a half million people lost jobs again last quarter.
And for the love of Pete, we're clear on the fact that incomes have eroded steadily for the vast majority of the population for the past 30 years or so. Everyone was buying on credit to avoid the inevitable conclusion that they have a much worse life than their parents did, and working two jobs (each) for the privilege. It was never sustainable. And it is not coming back.
Yes, I agree that there is some pent-up demand. But when it reemerges, it won't be going to white-table cloth establishments any more. It will be eating at Denny's. But first it has to pay down the variable interest rate debt, because we're all not so stupid that we can't see inflation coming.
And even if it doesn't come, I think a big part of the country has been disabused of the notion that a rising tide will float all boats.
Two thoughts …. you cannot understand the dynamics of money, income, and spending without understanding money as debt. 95% of all money in circulation in the US is attached to credt/debt creation. Unless they can get the credit outstanding curves to go parabolic in an upward direction, and soon, there can be and will be no recovery in spending, just a slow grind in a downward direction as money literally disappears from the system as old debts are paid down and whatever interest payments are collected go straight into the finance casinos.
This of course ignores the near complete collapse of shadow banking and its credit creation machine of just 18 months or so ago.
The Gov't/Fed simply cannot print money fast enought to make up for the loss of the money/debt creation engines in the private sector.
Based on the comments above, I'd say your readers have absolutely no idea where the "income" they and others spend ultimately comes from in our economic system.
The pent up demand argument is a red herring. There is always demand for everything. What there isn't is enough income to purchase all that we demand. Look at quarterly withholding tax receipts and you will see (by the most accurate method) that employment and wages are falling. Therefore we still have demand but less or no income to make the purchase.
The new normal isn't coming, it is here. All things considered, we would do well to recognize that we have been on a credit binge for a generation and we need to pay down our debts.
Given the magnitude of excess debt we are confronted with that means a devaluation of the dollar, a lot of asset repricing to much lower levels and very slow growth in all sectors of the economy.