Two Amazing Graphs About Consumer Spending
Calculated Risk has a post that must be seen to be believed. First off, look at personal consumption in February, which is back at pre-recession highs. This is quite amazing, and I admit, I am completely flabbergasted. No way did I think that consumer spending would rebound and that is a big assumption in my belief that we are going to have a double dip recession (well more to the point it still hasn’t ended) in the near term. This may look positive, but then look at the second graph: personal income minus transfer payments, which are direct payments by the government to individuals. That measure never rebounded and is still near the cycle low, even decreasing in February. This measure really captures the importance of government payments in trying to plug the consumer spending graph; it is about $800 billion (~8%) below the pre-recession high.
So what does this mean? Looking over time it is another measure clearly showing that the nature of recessions has changed in the past few decades. Every recession before the 2001 recession had the personal income minus transfer payment measure trough be coincident with the end of the recession and equaled or exceeded post recession highs within one year. The 2001 recession did not start increasing for nearly 16 months after the official end. Of course in that recession the measure was flat instead of dropping precipitously like we have seen. These measurements are demonstrative of the structural imbalances in a labor market that is growing increasingly unable to create jobs; indeed the post 2001 recession saw job creation begin in the middle of 2003, due to being in the middle of the biggest housing bubble in history.
It also means that government outlays are responsible for holding our economy in its current stagnant state, a situation that led to a combined deficit of nearly $3 trillion in the 2009 and 2010 fiscal years. I view it as a high stakes game of chicken with a catch 22 built in. The government cannot keep running such high fiscal deficits for very much longer, and as long as sustainable consumer demand is depressed then ending the high deficits will lead to another major recession; however if the government spends too much time trying to keep the system propped up then interest rates and debt loads will be so high that it will severely hurt us in the coming decades. On the other hand sustainable consumer demand can only grow based on secure job growth but companies won’t hire until they see it happening already. In the past increased short term government spending was enough to jumpstart the recovery, an outcome that seems far from certain now.
It reminds me of the most misused medical device on TV: the defibrillator. On the shows it is a magical device that is readily applied to everyone that has no pulse or looks like they are dead, miraculously saving or tragically failing based on the needs of the plot. In reality defibrillation only works when the heart is still beating, just not paying attention to the pacemaker or going through the cycles needed to pump blood. With the same symptom (i.e. no pulse) the treatment will be successful or not depending on state of the heart, if there is no rhythm (asystole) then defibrillation doesn’t work. My concern is that by ignoring the underlying state of the economy we are not giving the proper treatment and our current fibrillation will turn into asystole.
As wikipedia states:
Ventricular fibrillation is a medical emergency that requires prompt BLS/ACLS interventions because should the arrhythmia continue for more than a few seconds, it will likely degenerate further into asystole (a flat ECG with no rhythm- which is usually not responsive to therapy unless there is still some residual fine VF rhythm left or the patient is otherwise lucky AND is treated very quickly); after this, within minutes blood circulation will cease, and sudden cardiac death (SCD) may occur in a matter of minutes and/or the patient could sustain irreversible brain damage and possibly be left brain dead (death often occurs if normal sinus rhythm is not restored within 90 seconds of the onset of VF, especially if it has degenerated further into asystole).
To really stretch the analogy we can say that the response so far as been to give CPR by pumping the system with money, and I just hope that the focus turns to getting the rhythm back instead of declaring victory and letting asystole form.
In light of the new comment policy I am going to be cross posting everything on a blogspot blog so people can have a comment thread there. Link to post.
19 Responses to “Two Amazing Graphs About Consumer Spending”
Government must feed the guppy. What put the stake in the heart of the Great Depression was the massive spending of WWll. That was followed by an age of prosperity.
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This is not good news. I'm reminded of a USA Today cartoon with a couple talking over coffee. She's reading the paper; headline “Economic Slowdown”. He asks:
“When can we go back to wasteful consumerism
fueled by reckless borrowing against
our childrens' uncertain future?”
So there are hordes who befit a federal government that also is spending recklessly.
The rest of us have to pay, too, for that recklessness eventually.
That is not relief or a sign of recovery. That is scary.
“to give CPR by pumping the system with money”
Fiscal as well as monetary CPR — spending like crazy
Politics is more about perception than reality. This just seems like a big gamble with the assumption that, if you can fool people into thinking that all is well, all really will be well. Reality has a way of catching up with those illusions.
The analogy with shocking the heart to life or dying is not really what we are facing now. The stimulus package saved us from the deflationary spiral (of death, to reference the analogy) but it wasn't enough to affect the recession. The question is not whether we have deficit spending but how. If two years of high deficit spending can restart job growth it might result in less overall debt than ten years of deficits due to a Japanese type lost decade of no or low job and investment growth.
Something has to be done to correct the poor distribution of income in the country. In the Bush years 95% of the income growth went to the top 10% of income bracket. Thirty years of trickle down hasn't worked. How much longer will we continue to pretend it does?
“The question is not whether we have deficit spending but how.”
I think we need much higher deficits but that instead of focusing on short term demand primarily it should focus on long term foundations that enable sustained economic growth (i.e. recalibrating the rhythm of the economy). Stiglitz argues for investments that get at least 6% return, which can be done in transportation (smart infrastructure not repavement)/energy/healthcare innovation/education.
“Reality has a way of catching up with those illusions.”
Will it happen before or after 2020, is now the question.
“Stiglitz argues for investments that get at least 6% return”
I'd be okay with him replacing Geithner as Treasury secretary _and_ having input into stimulus decisions.
It is hard to calculate return on public investment. And I certainly disagree that smart investment is limited to transportation. Many of your 'nots' such as energy/healthcare innovation/education are areas in which some intelligent public investment could pay large dividends.
One message that should have gotten out in our recent health care debate is that our current health care system is grossly inefficient economically and it is becoming more so every year.
likewise our education system is also very inefficient. Too much much money goes into administration instead of teaching. We chose to ignore it in large part because of our instance on local control; where 14, 000 school districts independently face the same problems and come up with the same solutions.
The thought that energy is an area where smart, high return public investment cannot be made is almost beyond belief. In energy conservation alone much can be done. Private research and development has been dropping recently. Especially because of the recession. Besides private R&D is normally targeted to the smaller, incremental changes that promise returns in the short term. Public investment in research can go for big long term projects.
” Many of your 'nots' such as energy/healthcare innovation/education are areas in which some intelligent public investment could pay large dividends. “
No no, I wasn't clear enough for you to read it clearly. ” transportation/energy/healthcare innovation/education” are all GREATLY needed. “(smart infrastructure not repavement)” was modifying transportation, i.e. simple repaving and such like many of the stimulus projects is not good return.
I agree with your viewpoint completely.
Government needs to take a proactive role in defining a new economic vision moving forward and changing regulations/spending to facilitate creation of new industries, instead of just trying to plug end level demand and hope that private stuff will fix things, since “private R&D is normally targeted to the smaller, incremental changes that promise returns in the short term” and right now it's all just sitting there seeing no area to find that in.
Sorry, I did misunderstand.
I see that the Treasury had to pay a higher interest rate to sell off the inventory at the last auction. I think the deficit-spending is taking its toll. The transfer payment scheme is just masking the inevitable.
In the first quarter of last year, I read many posts here about how well the multiplier effect of transfer payments would work. I notice all of you are now silent on that topic.
” I read many posts here about how well the multiplier effect of transfer payments would work”
It did work…GDP with it stripped out it is insanely low. The problems are just far too big for them to resolve anything. At the time I had posts saying why I didn't think the stimulus would work for pretty much this reason.
I read that the federal government is going to make $8 billion when it sells off its Citibank stock. (It cost $25B, they'll sell it for $33B.)
This seems like a good sign…?
Both of which are getting messed up because they're getting further separated from their own economics. In public education, instead of trying to help local institutions with their common problems, state and federal authorities are imposing restrictive, often unfunded, mandates that create burdens instead of relieving them. In private education, the school loan program allows people to borrow enough to fund a degree, regardless of its worth. In health care, the insurance model has created perverse incentives to make treatment as expensive as possible, since there's almost always a third party to pay it, after the paperwork. It seems to me that it would take less, not more, money to fix these problems.
“and federal authorities are imposing restrictive, often unfunded, mandates”
Since the 1930s we have had an inversion of federalism. Now, consider what the result will be if a number of states go bankrupt in the next year or two (the worst case situation, beginning probably with California).
There may well be more centralization of power in Washington.