Government’s Prayer: Please Consume!

The Federal Reserve Bank yesterday announced, although with some demurrals, that it would keep the interest rate at zero or near zero into 2013. Why? Because the governors want people to invest. But does investment drive growth—or is it the other way around? What low interest rates signal is that cheap money will be available—and the markets liked that message. The Dow rebounded as soon as traders actually grasped this fact.

In his last speech President Obama urged renewal of the payroll tax cut (on which more here) into 2012. Why? Because he believes that the economy needs stimulus. Thus a few more dollars in the pockets of consumers will make them go out and consume. Other Keynesian economists wring their hands because huge budget cuts and a debt ceiling that must be lifted like every quarter from now on (it seems) against huge opposition, signals that stimulus will not flow. The prevailing view here is Paul Krugman’s: Stimulate and then, when things are up and running again, then worry about deficits.

This made me curious about consumption. Just how are we doing on the spending front. Herewith a graphic that shows Personal Consumption expenditures from 1990 through the second quarter of 2011.

The chart is rather informative. We’ve had three recessions in this period. As the curves show, personal consumption did not flag through the first two. At most, in two of its subcategories (nondurable and durable goods) it flattened just a little. But in the Great Recession, another story. There we see a quite visible dip in consumption overall as well as in every subcategory. But since the last one ended, consumption has resumed—if, to be sure, from a new low. The one exception is durable goods.

On this chart you see markers and numbers showing personal consumption in the second quarter of 2007, thus a time when things were still normal. The numbers at the extreme right show consumption in the second quarter of 2011, the last data point charted. They are all higher than the values clocked in the corresponding quarter of 2007 except durable goods. That category has not recovered and is still below the 2007 level. Negative growth.

Now it is interesting to note that in 2011 32 percent of that category is motor vehicles and parts, and that that sub-subcategory had the most negative results of all. In 2007, motor vehicles/parts represented 33.9 percent of expenditures. Two other categories, furnishings and household equipment and recreational goods and vehicles were also negative. The only redeeming sub-sub was other durable goods not further detailed.

Gasoline and other energy goods fall within the nondurable category. You have to have gasoline. In 2011, compared to 2007, people spent less on food and clothing and footwear and more on gasoline and other nondurable goods. In the services category, shifts between sub-sub categories were toward more expenditures on health care (the largest increase) and on food services and accommodations (eating out, in other words). All other categories, including the largest, housing and utilities, lost share.

We see significant and interesting shifts in categories. In the durables category, people are not buying cars, appliances, and furniture. In the nondurables category, gasoline dominates the picture. In services health care—a sector that is showing job growth—is the important category.

But what Personal Consumption expenditures exclude is purchases of housing (except rentals). The odd thought occurs: Is owning the family home the real root of the American Dream? And is the appreciation of that property the root of confidence? And when that sector starts tottering, does a rude awakening from the Dream cause people to purchase what they need—and not much more than that?

And that in turn suggests another thought. If the home has lost its value (never mind if you actually lost your home), does that improve your credit? And how much of the growth in durables depends on credit? Most of it, it seems to me. People are having problem borrowing, and this despite a financial market awash in cash. Why? The lenders have also been chastened. All of these factors play a role especially in the durables category—the category where jobs are not growing with any visible vigor at all.

The data shown here are available from Table 2.3.5 of this BEA source.