Consumer Spending Decline Not Due to Income Drop

By Bill Conerly, Businomics, Conerly Consulting LLC

Income and spending are both down, and it seems obvious that the one would lead to the other.  But which one leads to the other?  It’s not so simple.  Let’s look at the data.  (I only show the latest months, after the effect of the last stimulus plan had worked through the disposable income data.)

The drop in consumer spending is wildly disproportionate to the drop in disposable income.  Keep in mind that when people lose jobs, their spending typically falls by a smaller percentage than their income drops.  The use savings or credit to smooth their earnings.  From this fact you might expect that the change in spending would be smaller than the change in disposable income.  But the chart clearly shows the opposite.  What’s going on?

The change in spending is due to non-income factors (duh), which I think are primarily weak consumer attitudes and expectations.  The consumer confidence and sentiment surveys show plenty of doom and gloom, caused by the fundamentals of rising unemployment, fear among people with jobs that they may lose their jobs, the financial crisis headlines, and the negativity from the election’s attack ads.

(If you think the drop in spending was due to falling gasoline prices, you’re right that gas sales fell, but non-gasoline retail spending is also down.)

The outlook for consumer spending is thus . . . positive.  People are spending less than normal, less than justified by their actual incomes.  Even if unemployment goes to eight percent, we’ll still have 92 percent of the workforce earning a wage.  The money not being spent will burn a hole in people’s pockets.  It will probably take a few more months of spending declines for this hole burning to take effect, so the economy hits its low point in the spring.  The recession is over by the second half of 2009, perhaps a couple of months earlier.

Addendum:  after writing this point, I came across a good analysis of disposable income data by Dave Altig over at MacroBlog.  Bottom line: there’s reason to be hopeful, but it’s not conclusive.

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Bill Conerly is principal of Conerly Consulting LLC, chief economist of abcInvesting.com, and was previously Senior Vice President at First Interstate Bank. Bill Conerly writes up-to-date comments on the economy on his blog called “Businomics” and produces a monthly audio magazine available on CD. Conerly is author of “Businomics™: From the Headlines to Your Bottom Line: How to Profit in Any Economic Cycle”, which connects the dots between the economic news and business decisions.


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