I've been saying that consumer spending would soon increase. It has not happened yet, but consumers are now in position to get going. The key concept is that consumers have not been income constrained, as a group. In the aggregate, they are simply scared. They have the income to spend more, but they choose not to. Here's the month-by-month changes in disposable income and spending since last September (when the economy really started to tank):
Late last year, incomes were down sharply (the orange columns) but spending was only down a little. So far this year, there have been significant income gains, but without spending gains. So it is absolutely wrong to say that people have cut back on their spending because they don't have the money to spend. Certainly some people are in that condition, but not the aggregate mass of consumers.
As a result, the savings rate has risen sharply:
My look at long-run history (see this post) leads me to think that consumers will get back to savings of 8 to 10 percent of disposable income. Here are two ways to get there: continue recent patterns of saving all income gains for another four or five months, then spend the bulk of the income gains. That would add a good push to consumer spending, and thus the economy.
The second approach, which I think is more likely, is for the savings rate to come down a bit from the latest spike, like down to three or four percent. Then consumers would gradually ramp it up to the 8 to 10 percent range. If this happens, then spending growth will outpace income growth for a few months. This seems to be how past long-term changes in savings have occurred. This scenario is very positive for the economy in the next six months.
This is probably true, I know I've been saving in a sort of anticipation for the worst.
Posted by: Italian Rocket | June 28, 2009 at 08:48 PM
Bill nice article it's something we've been saying on our daily business radio show. Which brings me to ask you if you might consider doing a guest segment. We're on daily at 12:30PM Central until 2:00PM talking advertising and marketing and trends. You would be great to add something to the mix. We'll reference your article in the show today. Michael
Posted by: Michael Libbie | July 06, 2009 at 06:10 AM