Gas Rules Everything Around Me

Let me quickly explain what the chart below shows...

Since 1995 (the furthest back you can easily obtain real consumption by category), nominal gasoline purchases as a percent of personal consumption has increased by 44% (gasoline was 2.8% of all personal consumption, now it is 4.0%), while it has decreased by 33% in real terms (we now consume about 5% more gas in real terms, while overall consumption is up more than 58%).

In other words, we are spending a LOT more of our paychecks on gasoline, which in turn is becoming a much smaller portion of our real consumption. It would be rather interesting to know where the U.S. economy would be if all this consumption was freed for other goods / services (i.e. the benefit for the nation of investing in alternative energy).

Source: BEA

You Take the Good. You Take the Bad.

A few data points from today...

The Good

This morning's Chicago PMI showed that delivery times have slowed. How is this possibly a good thing? Well, if corporations are slowing delivers due to a lack of capacity, they are more likely to invest in more capacity, add (or at least stop laying off) employees, or in a perfect world... both.



The Bad: Sustainability of Consumption

Also released this morning was personal income and consumption for March. The chart below shows personal income, personal consumption, and personal consumption less transfer payments (defined as money given by the government to its citizens). Excluding these payments, which includes unemployment benefits, the savings rate is... wait for it... negative (good over the short run perhaps, but without hiring this hardly seems sustainable).



Source: ISM / BEA

More on Personal Consumption

In response to my post Something Sustainable reader Tom Lindmark commented:

As I understand the numbers, real PCE declined 0.1% and disposable income was up only 0.1% if you net out the effects of the reduction in withholding taxes and the expiration of Making Work Pay.

From a quick look it appears taxes actually rose $55 billion in the period in nominal terms (not sure real terms), but Tom is correct that real PCE declined in January, but predominantly due to a decline in real energy consumption (though nominal consumption remains high). This can be seen in the below chart that compares components of real PCE over 3 and 12-months. Notice that real consumption has declined in all areas, with the exception of services and energy.



Source: BEA

Not Sustainable - Part II

My Not Sustainable post from last month involved the same inputs; compensation (not to be confused with total income) and consumption. Noted back then was that real compensation has declined ~$400 billion, while consumption has jumped ~$150 billion since March 2007.

This month's 'Not Sustainable' goes back further... the recent period of over-consumption started as much as 30 years ago.



People now consume ~135% of compensation earned before taxes and ~155% of compensation earned after taxes paid. For some people, this may make sense (depends where you are in your life cycle / if you have other sources of wealth). But the ~135% and ~155% is the AVERAGE for every American at every age group and as we learned in 2007-2008, wealth can be fleeting.

Source: BEA

Not Sustainable

The WSJ details:

U.S. consumer spending rose twice as fast as income in March as saving dropped to its lowest level in 18 months and a closely watched indicator of inflation remained stable.

Personal income rose 0.3% in March as a weak labor market continued to keep a lid on wage growth, the Commerce Department said Monday.

Meanwhile, consumer spending -- which accounts for 70% of demand in the U.S. economy -- increased by 0.6% from the prior month, likely lifted by government efforts to spur economic growth.

With income growth sluggish, U.S. consumers slowed their pace of saving in March. Americans in March saved $303.9 billion as the national saving rate slid to 2.7% from 3.0% the previous month. The saving rate is at its lowest level since September 2008.

Below is a chart of the cumulative change in the largest sub-component of personal income, compensation, in real terms over the past three years.



And a chart of the same data, but in year over year terms since 1990.

The above disconnect occurred for a number of reasons (less savings, transfer payments [i.e. unemployment], return on financial assets, borrowing [commercial bank credit is down due to defaults, but net borrowing is actually up], and missed mortgage payments [some evidence that people are spending what "should be" their mortgage]).

None of which are sustainable.

As a result, look for consumption to slow unless wages and actual income levels begin to rise.

Source: BEA

What Consumer Slump?

Marketwatch with the details:

U.S. retail sales rose 1.6% in March, aided by strong demand for autos, building materials and new clothes. The Commerce Department said sales totaled $363.2 billion - the fifth gain in the past six months. Retail sales are 7.6% higher compared to one year earlier. Excluding autos and trucks, March retail sales climbed 0.6% to $300.5 billion. Economists surveyed by MarketWatch forecast sales to climb 1.3%, with sales excluding autos up 0.6%. Also, retail sales in February were revised slightly higher.

Source: Census

Are Americans Already Back to Their Old Ways?

Financial-Planning reports:

While 63% of Americans said they were concerned about the overall state of financial markets in 2009, just 45% said they were concerned in 2010.

Nervousness and fear about retirement dropped from 55% who were nervous or afraid last year to just 40% this year. American's concern about having enough money to retire has fallen from 56% in 2009 to 51% this year, the same as in early 2008, the study found.

“Americans appear more relaxed about retirement and are far less worried about their finances overall,” said Craig Hogan, Scottrade’s director of customer intelligence. “The number of people who reported being concerned about issues such as day-to-day expenses, education costs, paying off credit cards, and saving for big ticket purchases didn’t just decline – each category hit a four-year low.”

Which leads us to this morning's personal consumption and expenditure report. To the NY Times:

U.S. consumer spending rose as expected in February for a fifth straight month, while stagnant incomes pushed savings to their lowest level since October 2008, a government report showed on Monday.

The Commerce Department said spending increased 0.3 percent after rising by a slightly downwardly revised 0.4 percent in January. Consumer spending in January was previously reported to have increased 0.5 percent.

Source: BEA

More on Retail

My post on retail sales this morning may have been a bit misleading.

Are levels improving? Yes.

Are we back to old levels even in nominal terms? Not even close.



Source: Census

Strength in U.S. Consumption... of U.S. Made Goods

The following chart in my post On the Change in Q3 GDP shows that consumption of goods contributed about 1.7% of the third quarter's 2.2% GDP growth, BUT that the importation of goods removed more than 2% (GDP is a function of output WITHIN the United States only; if a good that was consumed here was made elsewhere, the negative value removes it from the overall GDP figure). That got me thinking... everyone is so focused on the U.S. consumer "bouncing back", but that ignores where those goods were made.

Prior to the recent "Great Recession", the marginal good consumed within the U.S. wasn't produced here. This can be seen (below) by the strong relationship between the change in goods consumed and goods imported. More interesting (to me) was the change in the relationship over the previous 12 months. Consumption of goods has indeed declined, but not nearly the level at which imported goods have declined.



Taken together, the chart below shows the difference between the two (the change in the consumption of goods subtracted by the change in the level of imported goods). This can be thought of as a quick and dirty way to estimate the marginal increase / decrease in consumption of goods made within the U.S. (i.e. consumption of goods ex. importation of those goods).



And surprisingly (to me) that level increased by more than $250 billion over the last 12 months.

Not really sure what caused this jump (trading away from expensive imports / trade barriers???), but it looks like the U.S. consumer has already been a much larger source of stability for the U.S. economy than many may have given them credit for.

The question of course remains... what happens now?

Source: BEA

Consumption Stabilizing... Now What

While we looked at personal consumption earlier this week, it is important to note that over the shorter run, we are beginning to see signs of stabilization.

First, the brutal year over year consumption cliff dive...

But again... stabilization over shorter time frames.

The question is HOW do we possibly rebound from here when consumer credit is so hard to come by, personal balance sheets are maxed out, incomes are declining, unemployment is rising, AND we are starting from such a low base of savings. How low? I think this chart speaks 1000 words.

That's right. According to Christianson Capital Advisors (via the Welsh Investment Letter), Americans spent more on gambling then they saved in 2007 before this mess. How do you increase spending from that unsustainable level? You don't. Thus, the need to figure out where else we are going to get our sustainable rebound.

Source: BEA

Income Down, Savings Up = Consumption Down = Stalled Economy

WSJ reports:

Without government support, personal income is under pressure as the U.S. workweek gets shorter. In a report showing the U.S. unemployment rate rose to 9.5% in June, the Labor Department said the average workweek for production and non-supervisory workers on private non-farm payrolls fell by six minutes to 33 hours -- the lowest since records began in 1964.

The bad job market is endangering a U.S. recovery. A key report last week said the economy slumped April through June by 1.0%, much less than over the winter. But the data showed consumer spending decelerated in the spring. Spending is a big part of the economy. While analysts foresee the economy rising in the current, third quarter, fear for jobs will likely keep wallets tight and hinder the expected growth the rest of the year.

The data Tuesday showed personal saving as a percentage of disposable personal income was 4.6% in June, the Commerce Department said. It was 6.2% in May, 4.7% in April, and 3.7% during March.

Below is a chart of personal vs. disposable personal income (notice the spike in disposable income from last years rebate check... didn't last for long).

Now, the money shot. Real personal consumption per capita vs. national savings.

Catch-22 alert. How do we get a recovery without the return of the consumer... how does the consumer return without a recovery?

Source: BEA

Update:

There seems to be some confusion (in my opinion) over this post over at Reddit. User Shenpen states (and has a lot of support from the Econ crowd) that:

This makes no sense. If savings are up, they are in the bank. If they are in the bank, they need to pay interest. They can only pay interest on it if they invest it. Investment creates demand for capital goods i.e. it simply diverts the jobs from making consumption goods to making capital goods.

True, in normal circumstances. Ignoring the practically zero cost of deposits, the issue lies when EVERYONE tries to save at the same time. Call it the "paradox of thrift". In a given moment it is in each participants best interest to save, but IF ALL SAVE AT THE SAME TIME then the overall income pie decreases as the economy slows (i.e. GDP decreases).

Thus while savings is rising as a percent of income, the overall level of income (thus savings) is actually decreasing. We can see this in the actual data. Savings as a percent of income has risen, but overall savings (i.e. investment within GDP) has fallen dramatically.

I will agree that this is one way out of the Catch-22. If investment towards capital goods (with actual use) does increase, then we don't necessarily need consumption to spring back for growth to return.

R.I.P. U.S. Consumer

Credit for the chart below goes to Wall Street Bear.



And where'd that money go (I used rolling 12-month as the monthly data is too choppy)?



Before you celebrate the fact that the savings will be consumption at some point in the future, think again. Per Market Ticker:

"Saving", by the way, includes debt paydowns; the government in its "infinite wisdom" computes the "savings rate" as "income less spending", which is not actually correct; money that goes from income to paying down debt isn't "saved". This increase shows that consumers continue to reduce borrowing activity (out of both choice and necessity) and are desperately trying to tread water in their sea of debt (never mind the occasional shark that comes by for a snack!)

Owe Jesse makes the case that reduced debt burden is just as good as savings and I will agree to that (and I'll admit I overlooked that). My thinking was related to the amount "saved" due to the making of interest payments that don't reduce an individuals debt burden. In that case, I don't see the net benefit going forward.

Source: BEA

Personal Consumption Declining for Durable and Non-durables

Calculated Risk touched upon this yesterday:

PCE declined sharply in Q3 and Q4 2008, and rebounded slightly in Q1 2009. Q2 2009 is off to a weak start, with PCE in April below the levels of Q1. Although it is possible that PCE will pick up in May and June, it seems likely that PCE will be negative in Q2 (although not the cliff diving of the 2nd half of 2008).

We can see the broad decline in consumption, Q1's uptick, and the recent reversal in the below chart.

Seasonally Adjusted Year over Year Change


Here's a closer look.

Seasonally Adjusted 3-Month Rolling Change

After the first quarter's rebound, both durable and non-durable purchases have once again turned negative.

Source: BEA

Personal Consumption Sinks

WSJ reports:

The spending of U.S. consumers dropped in March along with their incomes and they elevated savings to cope with the recession. Meanwhile, new U.S. claims for unemployment benefits unexpectedly fell last week, providing some hope that the pace of layoffs may be slowing somewhat after months of crippling job losses.

Personal consumption in March fell at a seasonally adjusted rate of 0.2% compared to the month before, the Commerce Department said Thursday. It wasthe fourth decline in six months. Spending increased a revised 0.4% in February; originally, spending was seen up 0.2%.

Source: BEA

Consumption Strength? Yes and No...

All I hear on CNBC is that the market shrugged off the horrendous GDP figure as personal consumption showed surprising strength. Is that true?

Yes...


And no...


Looking at the above change in personal consumption expenditure year over year, one can see the quarter over quarter figure was up, but just a rebound off of massive lows.

Source: BEA

Personal Consumption and Spending (October)

Lets do our part and consume lots of turkey tomorrow. Happy Thanksgiving!



Source: BEA