Tuesday, February 25, 2014

Consumers and the Health of the American Economy

As shown on this graph, consumer spending is a key part of the economy in the United States today, making up just under 69 percent of GDP:


According to the University of Michigan Consumer Sentiment index, consumers are a happier bunch than they were during the depths of the Great Recession as shown here:


Unfortunately, as you can quickly deduce, consumer sentiment is still well below levels seen during the recoveries after the 1980 - 1981, 1991 and 2001 recessions.

Here's a graph that shows the growth in real consumer spending since the beginning of the Great Recession in December 2007:


Note that real consumer spending fell to $9.843 trillion in 2009 but has risen by 9 percent to its current level of $10.728 trillion, a new high.

What doesn't look as healthy is the growth rate of consumer spending.  Here is a graph that shows the compounded annual growth rate in consumer spending all the way back to 1929:


Including all recessions (and the Great Depression as well), over the 95 years in the data base, consumer spending rose by an compounded average rate of 2.81 percent.  Please keep in mind that this includes the four years between 1930 and 1933 when consumer spending shrank by between 2.2 percent and 9.0 percent annually.

Here is a detailed look at the annual growth rate of consumer spending since 2007:

2007 - 2.2 percent
2008 - minus 0.4 percent
2009 - minus 1.6 percent
2010 - 2.0 percent
2011 - 2.5 percent
2012 - 2.2 percent
2013 - 2.0 percent

Last year's growth rate of 2.0 percent was the lowest level of growth in consumer spending since 1982, excluding the recession in 1991 when consumer spending still rose by 0.2 percent in spite of the economic contraction.  From the graph, you can easily note that, when measured using the annual growth rate of real consumer spending, this is one of the most modest recoveries in the past century.

Just in case you thought that consumers were being more prudent and taking on less debt, here is a graphic showing the fourth quarter 2013 household debt figures from the Federal Reserve Bank of New York:


Non-housing debt in the fourth quarter of 2013 rose by 3.3 percent from the previous quarter with gains of $18 billion in auto loans and $11 billion in credit card debt.  On a year-over-year basis, auto loan debt rose by $80 billion to $863 billion and credit card debt rose by $4 billion to $683 billion.  It certainly appears that consumers are not particularly adverse to taking on additional debt and that the spectre of debt isn't keeping at least some consumers from spending.


While the headlines suggest that the American economy is on the mend, with so much of economic growth relying on consumers, the rather modest growth in consumer spending compared to historical inter-recessional periods would suggest that economic growth will continue to be less than stellar and may go a long way to explaining why this recovery hasn't really seemed like the recoveries that we all remember so fondly.

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