The Consumption House Of Cards Falls Apart

This post is a follow-up to Personal Consumption Is A House Of Cards, which I wrote in May. The main result of that post came from Jake at his blog Econompic Data — Darn Nice Economic Eye Candy. The "official" savings rate is calculated by subtracting personal consumption from income. However, transfer payments from the government to households count toward both numbers. If transfer payments were subtracted from income, it turned out that the savings rate in the United States is negative.

From Jake's post—"Also released this morning was personal income and consumption for March. The chart below shows personal income, personal consumption, and personal consumption less transfer payments (defined as money given by the government to its citizens). Excluding these payments, which includes unemployment benefits, the savings rate is... wait for it... negative (good over the short run perhaps, but without hiring this hardly seems sustainable).

In that earlier post I concluded that a negative savings rate, combined with weak jobs growth and the ongoing political threats to transfer payments, made the high levels of consumption shown by government statistics unsustainable. Growing consumption was thus a house of cards. As of April, transfer payments made up a record 18.3% of personal income. This gives you some idea of what would happen to consumption in the United States if transfer payments were curtailed. See my post America's Road To Perdition.

What has happened since May? Personal Consumption Expenditures (PCE) have declined for 3 consecutive months.

Real (inflation-adjusted) PCE, from Calculated Risk. The red horizontal bars show PCE on a quarterly basis.  Remember, PCE includes transfer payments.

Another ominous development got very little attention. Yesterday—the day the world supposed to end—Calculated Risk reported that the Bureau Of Economic Analysis (BEA) had made some very significant downward revisions to personal income excluding transfer payments (see the 1st graph above).

On Friday [July 29] the BEA released revisions for GDP that showed the recession was significantly worse than originally estimated. This morning the BEA released revisions for Personal Income and Outlays.

One of the key measures of the economy is personal income less transfer payments, in real [inflation-adjusted] terms. Prior to the revisions, the BEA reported this measure was off close to 7% from the previous peak at the trough of the recession.

With the revisions, this measure was off almost 11% at the trough - a significant downward revision and shows the recession was much worse than originally thought.

Real personal income less transfer payments is still 5.1% below the previous peak.

From Calculated Risk. I added in the pre-revision level, which was 3.1% below the previous peak when I wrote my House of Cards article. It is now 5.1% below the previous peak.

Government revisions to Reality—things are always worse than originally reported—are not my subject today, but I'm sure you and I both could think of some choice things to say about "official" statistics.

So where do we stand consumption-wise? The government has so far refrained from cutting transfer payments, and we might even assume that they've gone up since May, in so far as that was the trend. Consumption has declined slightly for 3 months in a row, but on a quarterly basis, PCE is just about where it was in the 1st quarter (2nd graph above). Now, let's consider the savings rate excluding transfer payments. That rate was negative in May when Jake calculated it (1st graph above), but since then there has been a huge downward revision to personal income less transfers (3rd graph above). 

All this seems to imply that the savings rate excluding transfer payments is even further in negative territory than it was in May. This result accords with reports that "consumers" are having "cash-flow" problems, and are thus whipping out the plastic to pay for gas and groceries. See my recent post Insanity Prevails As The Economy Unravels.

The economy is playing out pretty much the way I expected it to. Pay attention to all the talk about whether we will have another recession if you want to, but such talk is misleading. The latest "thinking" says the economy has hit stall speed (Bloomberg and John Mauldin here). The only thing that has hit "stall speed" is the "thinking" of people using this phrase, and that happened many years ago. Outside of government stimulus, we never had a "recovery" to begin with. The human capacity for self-deception is effectively infinite.

Whether we have a recession depends on specific economic factors like the ones I discussed today. Going into recession marks the difference between really bad and slightly worse than really bad. It's a technical distinction that doesn't count for much. There are no rational arguments pointing to an economic boom in the near future, or in the far-off future for that matter. We will have more and more of the same, I'm afraid. And despite rumors to the contrary, the only thing the government can do is make matters much, much worse.

Comments

[sharonsj]

None of these so-called experts gets out of their offices, talks to average people, and just looks around at the closed stores and the for sale signs.

Any of us non-experts, who have to live in the real world, could have told these experts what's really going on. Things have been going downhill since before the financial collapse. Nobody can save any money if it's all getting spent on rent/mortgage, heat, electricity, phone, food, etc. Every one of these necessities has been going up in cost--despite the government claiming there is very little inflation.

Last week I went to buy sugar at Dollar General, because they have the cheapest price, and the shelf was completely empty. Sugar has gone up about 50% in the last 6 months. Meanwhile, despite the news saying that the price of crude is down the last 6 weeks, the price at the pump hasn't changed. All my conversations with friends has to do with how we're going to pay our bills, what can we do to earn extra money, etc. And the crazy Republicans are only making it worse by carrying on about spending--only government spending is keeping us from a great depression.