Economic Notes: Consumers: Cautious Not Comatose
10/12/2009
By Patrick O'Keefe, Director of Economic Research, J.H. Cohn
Consumer spending
, which has been moving steadily upward since bottoming in April, surged in August. The 5.8% gain in real (i.e., inflation-adjusted) spending was the largest monthly increase in almost eight years. Does this signal a longer-term shift?
A significant portion of the jump was the result of the “cash for clunkers” incentives, which spurred auto sales to the highest level since the recession began in December 2007. But auto sales were not the entire story. Consumer spending on nondurable goods and services also rose in August, although at lower rates.
Progress, to be certain. But despite the sustained rise in personal consumption expenditures, consumers are only back to where they were at the beginning of the financial panic in September 2008.
A number of factors suggest that September’s spike will be a one-time event. To cite just a few:
First, the labor market remains weak and unemployment, which on the narrowest of definitions exceeds 15 million, continues to move upward.
Second, reduced employment – and hours for many of those with jobs – has constrained earnings and, as a result, total personal income has been flat for most of the year. More tellingly, after adjusting for inflation and population growth, after-tax income has declined over the past couple of months – despite reduced payroll taxes and increased income transfers.
Third, while consumers spent more in August, they continued to save and retire debt. It is highly likely that, with the “clunkers” incentives in the rear-view mirror, the decline in consumer credit will accelerate.
Recent data demonstrate that while consumers may not be comatose, they remain cautious. It will take more than “clunker” incentives to relieve them of their anxieties to the point where they spend more freely. That will require robust job growth, rising after-tax incomes, and smaller credit card bills.
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