Monday, February 2, 2009

Personal Consumption Down... No More "Borrowing" Buffer

Marketwatch reports:

Personal incomes and consumer spending fell in the United States in December from November, the U.S. Commerce Department reported Monday. Incomes dropped 0.2 percent, while disposable income also fell 0.2 percent, the government said. In the previous month, incomes fell 0.4 percent, while disposable income fell 0.3 percent. Consumer spending, meanwhile, fell faster, dropping 1 percent, the report said. Consumer spending, which drives a lion's share of the U.S. economy, fell 0.8 percent in November and 1.1 percent in October.
In other words, the savings rate increased (if spending drops more than income, that means it is going to savings). Looking at the chart below whichs details the savings rate going all the way back to 1948... it's about time.



This increase in savings was expected for those trying to get their personal balance sheets back in order (and required when the savings rate actually turned negative in 2006). However, just because it is needed, doesn't mean it won't be the cause of significant pain for an economy made up ~70% by consumption.

As can be seen below, we are entering a new secular phase for the U.S. economy. For the past 16 years we have had unbelievably "smooth sailing", with personal consumption growing a steady 1-4% per capita in real terms over that entire period. What I found interesting is what I will refer to as the "borrowing buffer". That is, when disposable income didn't increase (the blue line), the U.S. consumer was able to borrow to keep up the spending pace (the red line).



Until now. With the turmoil in consumer credit, lack of supply (and in many cases demand) for cheap credit, the "borrowing buffer" is no more. Personal consumption broke through the 1-4% range and is now down almost 2% in real per capita terms over the past year. In other words, personal consumption like most other economic data, has fallen off a cliff.

This is why the government has and will continue to pick up the private sectors slack.

Source: BEA