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Is Spending Recovering?
| Wed Nov. 18, 2009 8:50 AM PST
Over at TNR, Zubin Jelveh puts up this graph of consumer spending and notes that it's turned up since August. Last month it even crossed above the zero mark, meaning that consumer spending is up a bit from the same period last year.
But the great home equity ATM is gone, and that was a big part of what drove increases in consumer spending in previous years as homeowners took out enormous HELOCs to amp up an unsustainable lifestyle. Without that, will we start seeing increases of 3.5% anytime soon?
A new study by the Boston Fed's Daniel Cooper suggests that we shouldn't be overly concerned with the impact of declining home-equity extraction on spending. Cooper argues that only the credit-constrained (that's economist shorthand for those with little access to credit) borrowed heavily against their homes to consume. He estimates that an 11% decline in housing wealth in 2008 lead to only a 0.75% fall in non-housing-related spending. In other words, declining home prices could only have a small impact on people's willingness to spend. The basic reason is that, in a given year, the majority of homeowners are not credit constrained, so a big drop in home prices shouldn't affect their spending ability (that is, if you believe Cooper and Willem Buiter's contention that the housing wealth effect is really the housing-as collateral effect).
But isn't the bigger question not the impact of one single factor on spending, but where increased spending is going to come from at all? Basically, it can come from (a) wages going up, (b) increased debt, or (c) spending down savings. Real wages have gone up a bit lately thanks to negative inflation, but that's strictly a short-term blip. I don't think anyone expects wages to increase in the future at more than their historical 1-2% rate (1% if you count only cash wages, 2% or so if you count healthcare expenditures too). Increased debt is out of the question too. Consumers are paying down debt, not increasing it. And savings are going up, not down.
None of this stuff has to last forever, and eventually all the deleveraging will be over and we can return to fundamental growth rates. But even then, with debt and savings neutral, that growth rate is going to be determined by wage growth. In the near future, at least, it's hard to see how that gets us back to 3.5%.
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Comments
You missed one -- job
Submitted by joshjosh on Wed Nov. 18, 2009 8:58 AM PST.
You missed one -- job security. I think a lot of people aren't spending not because they don't have a HELO to siphon or their wages are stagnant, but because they have no job at all or are worried about losing theirs. See, e.g., the legal profession.
yep
Submitted by Dave Brown on Wed Nov. 18, 2009 9:25 AM PST.
The increase we are seeing now is largely due to pent up demand. You can only put off buying a new refrigerator or painting the house for so long. But I don't expect to get back to previous growth rates anytime soon.
As far as wages, the trend has been for those at the lower end of the scale to get smaller increases, while those at the upper end get larger (percentage) increases. I see no change in this trend and expect it to continue for some time, absent government intervention.
Fundamental growth rate?
Submitted by DMonteith (not verified) on Wed Nov. 18, 2009 11:59 AM PST.
"But even then, with debt and savings neutral, that growth rate is going to be determined by wage growth."
It seems more likely that that growth rate is going to be determined by the price of oil, and that's not likely to be good news for wages or anything else. Just saying.
How much of that spending
Submitted by MacGruber on Wed Nov. 18, 2009 1:56 PM PST.
How much of that spending came from Cash For Clunkers? Is it possible to figure that out?
I have a feeling that uptick is probably somehow related to Cash For Clunkers and hence, is a one-time deal.
What does this mean? Welcome to Japan, folks. I have a feeling we'll start to mirror the Japan from the 1990s: a growth in savings, but not a growth in spending. Banks will have obscenely low lending rates, but that won't stimulate spending, only dollar carry trades.
Maybe this is the wave of the future. People realizing that spending and spending isn't all that it's cracked up to be. Maybe people will realize a large chunk of the crap they've bought in the past isn't worth it. And won't be worth it going forward.
Plasma TV?
Our household has survived just fine with a couple of old CRTs, one of which I bought off of Craigslist last year for $40: 36" and less than three years old. The seller had - surprise - upgraded to a state-of-the-art LCD which is not longer state-of-the-art.
The market will figure out how to find companies/industries/professions that give people jobs with good wage growth. Maybe it will come via an anti-China strategy: producing higher-quality items that aren't massed produced. Maybe instead of cheap plastic toys, an American company will make higher-quality toys. People will realize Johnny and Janie don't need a room full of plastic garbage to play with; give them a couple of really nice toys and they'll be just as happy.
You're Absolutely Right
Submitted by nepeta on Wed Nov. 18, 2009 9:41 PM PST.
Oct. 30 (Bloomberg) -- Spending by U.S. consumers fell in September for the first time in five months after the government’s auto-rebate program expired.
http://www.bloomberg.com/apps/news?pid=20601068&sid=aRU4Kq.dAabo
Consumers are paying down
Submitted by Luther on Wed Nov. 18, 2009 2:09 PM PST.
Consumers are paying down debt...
Paying down consumer debt, while watching their share of the national debt going gangbusters to pay for bailouts, healthcare, continuing wars, and so forth.
You can move debt around--Wall St., AIG debt to taxpayers, Obamacare and Bush war debt to China, etc., but you can't really improve matters by just juggling poverty around. If you keep increasing the debt pot without any production of wealth, something must give eventually.
The complexity and lack of
Submitted by neutrino23 on Wed Nov. 18, 2009 11:39 PM PST.
The complexity and lack of transparency makes this really hard to fathom.
On a day-to-day basis it looks like things are slowly picking up. I attend various industrial trade shows as part of my job. Attendance at these shows is picking up and interest in capital goods is picking up. The stimulus money has yet to really kick in. There are requests for bids out there but few have closed yet that I know of.
On the other hand, I worry about more shocks to come. There is a slug of ARM mortgages due to reset in 2010 that will be a big problem. There is the issue of investment banking that is going to be a problem in a year or so. There is a forecast that about 2 million jobs will be lost as many of the debt laden companies these guys spin out go under. Probably there are more goblins in the anxiety closet that I don't know about.
I don't know how bad any one of these will be but I suspect that the cumulative effect of these and other shocks yet to hit will be very difficult to deal with.
ignorant carping
Submitted by RobertWaldmann on Thu Nov. 19, 2009 8:46 AM PST.
I haven't read Cooper's study so I shouldn't comment. However, I don't find it convincing. I don't think that house prices affect consumption only via Heloc's used to finance consumption. I think that owning a valuable house will make people more likely to spend out of their other wealth. Wealth affects spending of the non liquidity constrained and self perceived wealth has decline enormously.
Frankly, I suspect that Cooper is assuming that people have rational expectations and so only spend their housing wealth if they are liquidity constrained or planning on moving (if one stays in the same house the increase in wealth is totally absorbed by the increase in the cost of one's housing -- I mean unless one sells or buys something the price doesn't matter).
If people were rational, there would never have been a housing bubble. An serous analysis of the effect of the bubble and its bursting (or anything else for that matter) can't rely on the standard assumptions of economic theory.
No jobs - No growth
Submitted by Anonymous (not verified) on Fri Nov. 20, 2009 6:50 AM PST.
Debt growth isn't real growth. It's just pulling demand forward. Eventually you have to pay off that debt with more money than you spent in the first place, which constrains future spending. We've spent the last couple decades seeing an explosion in debt growth while wages remained anemic due to our government's refusal to stop the hemorrhage of jobs leaving this country for cheaper wages. Debt growth and various bubbles fueled the GDP growth of the 90s and 00s. Meanwhile most of the benefit from this growth was funneled to the top 1%. Oh what a clever trick! Keep wages down and get people to increase spending by borrowing. Except in the long term, there's a limit to how much debt a person can take on and continue spending.
As far as savings, most Americans don't have much, except retirement accounts which it would be disastrous if they started spending before retirement. Many have because they lost their jobs and had no choice.
So that leaves wage growth. Many people don't seem to realize that many of the jobs that are disappearing are not cyclical, but structural. That means they are not coming back. Just witnessed my husband's former company, a huge bank which has never turned a loss through all this, outsource their entire software QA department to India. We keep being told that America will lead with "new technologies" while those boring, rote jobs go away. Except IT jobs are flowing to India at an alarming rate. Except even those "green jobs" we were told so much about, are going to China too, which is leading production of solar panels and wind turbines. And the stimulus is flowing to companies that do outsource, and nothing is being done about it. So we're spending our tax dollars to stimulate the economy of foreign nations. Meanwhile over 10% of our population is unemployed. We have no bargaining power to get wage growth. In fact, some economist recently wrote in the NY Times that American wages need to go down further in order for us to be competitive. So where does that leave us as a 70% consumer economy?
Yes, all this blather about
Submitted by dware (not verified) on Fri Nov. 20, 2009 9:30 AM PST.
Yes, all this blather about money supply, deficit spending, TARP, health care, taxes, unemployment, savings, debt etc.... are all symptoms. Bottom line... our jobs (blue collar in the 90's and white collar in the 00's) have been exported to cheap labor countries. These countries do not have safety laws, environmental laws, unions, consumer protection laws and so on. To compete we must employ our children at 60-80 hours per week at less than minimum wages to produce an inferrior product whose waste is dumped into an unregulated environment. Welcome to the global economy. We've traded away our values!!!!!!
All other issues are merely distractions to keep us occupied until the transition is complete.
BINGO- Give a cigar to the
Submitted by Awareness (not verified) on Fri Nov. 20, 2009 9:44 AM PST.
BINGO- Give a cigar to the lady who commented about the off-shoring of jobs. Off-shoring is a topic the corporate media cannot afford to address. Everything else is BS -- intended to keep us confused, distracted and divided. Now, let's race to the bottom.
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