Consumer Spending: No One Has A Dime

Bernard Baumohl, chief global economist at The Economic Outlook Group, reviewed the data and told Reuters, “There is no way that this recovery can be sustained unless we see a pickup in household spending. The big question out there is will we see Americans spend again to keep this recovery alive.”

The Fed data says a great deal about what is wrong with programs to revive GDP growth. Money spent on long-term infrastructure projects and healthcare may be well-intended and even completely necessary, but that capital does not have the capacity to put people back to work quickly or get them to spend money that they genuinely believe that they do not have.

American consumer spending has run on credit since after WWII and that is not going to change overnight. People who are anxious about their jobs or incomes are not likely to want to borrow money or buy on credit. There are only a few ways to solve that problem. The first is to put more money in their pockets. That is generally done through tax rebates. The Bush Administration tried that form of stimulus. The positive effects on spending only lasted a month or two. That does not mean it did not work. It does mean it won’t work for very long if it is done just once every year or two. People who are nervous about their financial welfare need to believe that whatever financial credits that they get from the government are ongoing. Ongoing government-paid credit for tens of millions of taxpayers is expensive, but the current Administration may find that an expensive route is the only way out of the current crisis. The sum of all the new federal programs is already costly; it may be that the programs are just aimed in the wrong direction.

Household spending is obviously an aggregate figure of all American households, which means the number is weakened more and more because a larger and larger number of people have become unemployed.  This is a simple view of the problem, but does not undermine its accuracy. The unemployed play a bigger and bigger role in the prevention of a real recovery in the economy as 2009 moves on.

July is awfully close to the fourth quarter. The 2009 holiday spending season may be the most important one in memory. If retail spending is flat or declines, it will mean that the hibernation of the consumer will continue well into next year. That will cause layoffs in the retail sector and in many industries that get most of their sales through retail outlets. The slowing rate of unemployment increases in each of the last four months could be reversed in January 2010 and layoffs may well increase toward 500,000 a month next year.

It is frightening that the economy is currently facing another calamity that will play out in just 3 months. In that way, it is not unlike the banking crisis of a year ago. The Administration and Congress knew that a matter of weeks could make the difference between a collapse of the credit markets or a chance to put them on the early and unsteady road to recovery. Consumer spending is in that place today, near collapse with no support in sight.

Douglas A. McIntyre