Sent: 03-02-2009 12:09:02
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US Consumers: Leaving it to the Government
U.S. consumers are more than ever leaving the heavy economic lifting to their government.
The latest personal income and expenditure statistics from the U.S. Commerce Department have highlighted a stark contrast in growth rates between consumer spending and personal income.
Despite the bleak economic picture of the U.S. economy painted by most commentators, personal disposable income in the December quarter was a creditable 2.7% higher than a year earlier.
There is a chart at http://www.thebigpicture.com.au/atc/uspce.htm showing movements in disposable income growth over the past twenty years. The chart shows that the most recent growth rates are toward the low end of this experience but still within the range of growth outcomes over that span of time.
Disposable personal income has grown at an average rate of 5.1% a year since the beginning of 1990. Just on half that time, growth sat between 4% and 6%. There were 45 months in all when the annual growth rate was lower than 4%. So, the income numbers suggest far more precedents for current conditions than newspaper headlines on the state of the economy.
The spending statistics are another story. A contraction of 1.1% over the year to December is as low as consumption growth has fallen, by a long way, during the 50 years the monthly statistics have been compiled. Consumption spending had never contracted over a 12 month period before. The second chart highlights the extent to which consumption growth has plummeted.
Since the beginning of 2008, despite annual disposable income rising by US$200 billion, annual consumption spending fell by $105 billion.
The numbers provide further evidence of the constraints on policy. Interest rates have been pushed to near zero and now consumers are signaling that they are unlikely to help out, highlighting the risk that any windfall through personal tax cuts, for example, might simply be tucked away for another time rather than spent to shore up a flagging economy.
U.S. consumers are now spending over $295 billion a year less than they would have done a year ago from the same income. If they were to become so shocked by the threat of unemployment and falling house prices that they reverted to the higher savings levels that prevailed at the beginning of the 1990s, say, that would knock out another $295 billion in annual spending.
Suddenly, the seemingly huge economic stimulus packages being debated in the U.S. Congress do not look so big. In round numbers, anything less than $500 billion over the coming year will barely compensate for a reluctant consumer let alone weaker business and housing investment or a consumer intent on radically restructuring its household accounts.
The challenge for the government is to persuade consumers to maximize their spending growth and avoid leaving the impression that public funding can come anywhere near to compensating for such a potentially dramatic shortfall. To the extent that consumers conclude the government can do the job without them, the government's task will be that much greater and success correspondingly less.
Of course, to the extent that there is any silver lining in this especially dark cloud, higher personal savings have made the funding task of the U.S. government that much easier, at least for the time being.
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