I have noticed an interesting trend as the nation continues to claw out of the ugly recession. While the job picture remains bleak, those who do have jobs seem to be ready to exhale and do a little shopping. The financial collapse of a year ago triggered a period of uncertainty that lasted thru most of July. Even if you had a job, you probably knew someone who lost theirs, or you looked at your retirement savings and saw 10 years worth of growth wiped out. That alone can rain on a shopping spree parade. But as the stock market has improved (the Dow up 28% over the past 6 months. It saw a 15% jump in the 3rd Quarter alone – its best quarter since 1939) that has helped those who aren’t looking for work– feel better. As a result– they are cautiously loosening the purse strings and giving into that pent up demand to shop. Many economists have asked whether we can have a sustained recovery with such high unemployment? It is a good question, but one of the best things the people with jobs can do to help those without jobs, is to dip their toe back in the water and spend a little. I don’t mean the out of control, over-extended spending we saw in the boom that led to the bust. Most of us couldn’t do that today, even if we wanted to. What appears to be happening is that rational spending is once again taking place. As businesses and consumers invest their cash in worthy products and services– more people will be needed to meet that demand.
Most forecasters say the recession is over, and their focus now is on the future. How can we have sustained growth, that creates jobs, that does not lead to runaway inflation? Consumers are starting to do their part, and so are some businesses (more need to step up). It’s also time for rational spending to return to Washington, in this case– it’s reigning in the purse– not loosening it. A case was made at the height of the crisis, that huge spending was needed to right the ship. That appears to be happening. If those in-charge want to end up as heroes in the history books, they need to show a smart strategy for deficit reduction that keeps the U.S. competitive in the global economy. Smart programs that will pay dividends to our children are worth the investment. But spending to spend– can no longer be justified. The American consumer appears to have learned their lesson.. lets hope our lawmakers have too. -Mary
BTW here is Economist Joel Naroff’s take on today’s August Spending and Income Report. Joel’s commentary has been right on this year. He is the President of Naroff Economic Advisors.
INDICATOR: August Spending and Income
KEY DATA: Consumption: +1.3%; Disposable Personal Income: +0.1%
IN A NUTSHELL: “The wallets were dusted off and it wasn’t just to trade in the clunkers for cash.”
WHAT IT MEANS: The iceberg is melting. Consumers had given the malls the cold shoulder but that seems to have changed. In August, spending grew at the fastest pace in eight years. Yes, “Cash for Clunkers” played a major role in generating the huge increase but it was not the only reason people parted with their hard-earned cash. They also went out and spent a lot on soft goods. In addition, demand for services rose solidly. In other words, we shopped ‘till we got tired. Can households keep up this level of spending? That is not clear. Incomes rose only modestly. However, one good sign was that wages and salaries continue to post gains despite the declining number of jobs. As the payroll losses ease, we could see income growth improve and that would put a floor under spending. In the interim, people are drawing down their savings, which fell for the third consecutive month. As for inflation, there was a large rise in energy costs that pumped up the rate but excluding food and energy, prices remain well contained.
MARKETS AND FED POLICY IMPLICATIONS: Instead of restraining growth, consumption is likely added solidly to GDP in the third quarter. While government policies, especially “Cash for Clunkers” hyped spending, the good news was that people are out buying lots of other things. However, as I have warned in my discussion of the coming “head fake”, don’t expect the solid growth we should get to be repeated. Ultimately, income growth will drive consumer spending and businesses seem to be intent on watching their wage costs carefully. Thus, while new claims for unemployment insurance are generally edging downward, they are doing so only slowly. It will be quite a few months before we see job increases rather than losses and even then the increase could be modest. That argues for minimal income gains and sluggish consumption growth. Still, it is nice to see that there are ways to get people to buy, even if it takes taxpayers dollars. Now they have to start standing on their own. The Fed is taking this all in but so far is in no hurry to start raising rates. But I still believe that once they start, they will do so with “alacrity”, as Dallas Fed President Fisher recently stated. Maybe that limb I am out on is not that thin.