Monday, November 2, 2009

Consumer Spending Hits A Speed Bump In September

Many experts believe the recession is past, but this optimism is not reflected in consumer spending. Unemployment concerns are still plaguing consumers and the persistent lack of public confidence in the economy is reflected by this month’s drop in consumer purchases. See the following from Expected Returns.

From Bloomberg, Consumer Spending in U.S. Declined in December:

Spending by U.S. consumers fell in September for the first time in five months after the government’s auto-rebate program expired.

The 0.5 percent decrease in purchases matched the median estimate of economists surveyed by Bloomberg News and followed a 1.4 percent jump in the prior month, Commerce Department figures showed today in Washington. Incomes were unchanged, while the savings rate climbed.

Stagnant wages and concern over mounting unemployment are causing confidence to wane, raising the risk that consumers will retrench in coming months as government assistance programs run out. The report also showed inflation was lower than the Federal Reserve’s long-term projection, indicating the policy makers can keep rates low.

The persistently weak unemployment picture and stagnant wages help explain the "surprising" slide in confidence in October and the drop in consumer spending. With the recession now apparently over, shouldn't consumer spending be rising dramatically?

The Keynesian economists that champion the usage of debt to stimulate economic activity using esoteric, but flawed, arguments about stimulating "aggregate demand" are not focusing on the tremendous debt overhang that is inherent in our system.

Hangover Effect

Autos in October probably sold at a 9.85 million pace, down from an average 11.5 million rate in the third quarter than reflected the boost from ‘cars-for-clunkers,’ according to the median estimate of analysts surveyed by Bloomberg News. Purchases averaged 13.15 million in 2008.
Inflation-adjusted spending on durable goods, such as autos, furniture, and other long-lasting items, fell 7.2 percent last month after increasing 6.7 percent in the prior month.

So essentially, even with all this government stimulus, consumer spending has been flat the past couple of months. In a genuine recovery, the government wouldn't even have to think about stimulating the economy since private economic activity would, by definition, be growing. The only thing that is growing right now is government spending, and I will continue to say that this trend is not sustainable.

This post has been republished from Moses Kim's blog, Expected Returns.

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