An Unsustainable Gap

To the bulls, news that personal spending was up four percent in December on a year-over-year basis, even though personal income only just managed to eke into the black (+0.5 percent for 2009), indicates the consumer is (still) alive and kicking.

In fact, it wouldn't be surprising if some analysts noted the similarity between the current trend of those two data series and what we witnessed almost three decades ago, when a dramatic burst of consumption kicked off the economic boom of the 1980s and 1990s.

Unfortunately, this theory has a few holes in it. For one thing, Americans have far less pent-up demand in the form of savings than they did back then, when personal savings rates as a percentage of disposable income were considerably higher than they are now. They are also much more indebted now than they were before.

In addition, a much greater share of their income nowadays is derived from government largesse, as I noted in "A Growing Share of Americans' Income Comes from the Government." For all their failings, it does appear that government stimulus efforts have put some money in people's pockets.

Either way, given what we do know about the health of the consumer, it seems a good bet that spending won't hang in there for too long without a genuine pick-up in economic activity.

So far, there's little evidence that that's the case.

Comments

[Bubba]

Eric Janzen on itulip has a breakdown of the PCE that digs into personal expenditures. Seems much of the extra money people are spending is going towards debt servicing, not personal consumption.

[CrisisMaven]

That rests all on feet of clay: "Of Mortgage Brokers, ARMs, Attrition and Marathons" (http://crisismaven.wordpress.com/2010/01/28/bloom-of-doom-ii-of-mortgage-brokers-arms-attrition-and-marathons/). By the way: I have just added a Reference List (http://crisismaven.wordpress.com/references/) to my economics blog with economic data series, history, bibliographies etc. for students & researchers.