Consumer Spending Rises While Savings and Income Decline

by | Mar 1, 2010 | Headline News | 8 comments

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    According to the US Commerce Department, consumer spending for the month of January continued a climb:

    Adjusted for inflation, real spending on goods increased 0.8%, while spending on services rose an anemic 0.1%, according to the Commerce Department’s estimates.

    In current dollars, consumer spending rose 0.5% to a seasonally adjusted annual rate of $10.3 trillion for the first month of 2010.

    The report was a “mixed bag,” said economists for Merrill Lynch, noting weak income growth.

    We need to see improvement in both the willingness and ability of consumers to spend,” said Jim Baird, chief investment strategist for Plante Moran Financial Advisors. “Unfortunately, constraints on credit availability and expectations for muted job creation present substantial headwinds to a resurgent consumer.”

    If the government’s numbers are to be believed, consumers seem to be returning to stores, even though behemoths like Walmart reported lower retail sales numbers in the 4th quarter of 2009. If nothing else, this number is indicative that people still want to spend, but the problems we face are evident in the February declines in income:

    After adjusting for inflation, after-tax incomes fell 0.6% on the month, mostly due to large non-withholding tax payments reflecting higher incomes from investments and bonuses in 2009. It was the largest decline in real disposable incomes since July, just after a one-time stimulus payment to seniors.

    We spent more money on consumer goods, but we made less money.

    So where did that money to spend come from? Savings, of course:

    With spending rising faster than incomes, the personal savings rate fell to 3.3% of disposable income from 4.2% in December. It was the lowest savings rate since October 2008.

    What we will eventually run into with consumer spending is a mathematical brick wall.

    If personal incomes continue to decline, credit availability for consumers disappears and job losses mount, that savings rate will continue to fall towards 0.0%. Though savings will probably never go to 0%, it is clear that consumer spending cannot continue to rise indefinitely.

    And because consumer spending is the machine responsible for 70% of our economic growth, when that number starts to decline, expect to see significant contractions in GDP.

    We’d suggest that these negative declines and contractions will start being reflected in our economic numbers by the 3rd or 4th quarter of 2010, especially if we witness a serious economic catastrophe in Europe or the US real estate markets.


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      1. This will speed up the crash. Americans havent learned a single thing from this crisis.

      2. I wonder if it is similar spending to the kind of spending that business did.  Restocking of essentials vs. the gizmo.  Buying tires, car parts, or replacing worn out shoes is something you can only put off for so long.  An analysis of what the spending was on would be helpful.

      3. I do not think Americans want to accept the truth.

      4. Tony – I agree, Americans have not learned a thing.  Americans are addicted to spending and it’s going to take more that the last 18 months for most of them to get it.  Hi, My Name is John Q American, and I’m a Spendaholic.   Hi John!

      5. Chris, I spent about 30 minutes trying to pull this specific data, but unfortunately I was unable to find it… I am not an economist/analyst type for these kinds of things, therefore I didn’t know exactly where to look. I will put out an update as soon as we get more info on this. I suspect gas purchases had something to do with it – but that’s just speculation.

      6. Chris – Good point.  I wonder how much of it was in the purchasing of good for the future downfall.  Beans, bullets and bandaids.

      7. Here is my whole problem with this article (not yours Mac but the original one from the US Commerce Department).

        They (government) want us to believe spending is going up, which will hopefully reinforce the “good times are here again” mentality and force a feedback loop which encourages yet more spending. So they tell us that spending on goods is up 0.8%. This sounds good right? Not so fast. The catch is this figure represents a number adjusted for inflation. So here’s my problem. We know (most of us know) the government always underreports official inflation, making it seem 3-4% lower than what it actually is (again for psychological reasons and also as a means for politicians to pass their deficit spending bills without directly raising taxes). The government would have us believe that official inflation is around 1% (I can’t remember the exact number). What if the real inflation rate is 5%? Well, that 0.8% increase goes “poof” and you end up with a much smaller increase, possibly a real decrease in spending. All of a sudden the picture looks much bleaker.

        This works for the after-tax income figures as well. The 0.6% decrease in income is actually worse since the official inflation is manipulated downward.

        So once again they are able to spin this confusing story (but infuse green shoots nonetheless) by manipulating the base data.

        We are in a serious contraction RIGHT NOW and they would have us believe differently. Perception is everything. We are being lied to because they know that without the 70% consumer economy actually consuming everything goes to hell.

        I would wager a bet that consumers ARE NOT returning to stores on a national basis. They are simply paying more for gas and food as they have been for the past several years, a trend that is not likely to reverse itself for a very long time. But thanks to hedonics, geometric weighting, and substitution, all these wonderful price increases are adjusted out of the official inflation figures!

        Eventually, job losses and dollar weakness will prove too great and will overwhelm the government manipulated numbers. The only question of course is when does this happen. I have no idea any more, but I would say anywhere from 6 months to 3 years.

      8. If a large proportion of the populace is in the same mindset and operational mode as my wife and I this consumer debt driven economy is going to crash and burn like never seen before.  For the past two years we have bought basically nothing in the way of big ticket consumer goods.  We’ve even gottten to the point of clothes shopping at consignment sales, thrift stores, etc.  I can’t remember the last time I bought a pair of shoes!  Mortgage, utilities, insurance, food, i.e. only that which is needed to sustain ourselves.  If any of you need help in getting to this point I suggest you visit 

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