Don’t Count on the Consumer

There is a prevailing view held by American policymakers that debt and resurgent consumer spending will lift the country from today’s financial morass.  The thinking goes that the road to recovery will be reached only if consumers once again start to borrow and spend.

It was therefore interesting to read a recent report by David A. Rosenberg, Chief Economist & Strategist Gluskin Sheff that identifies “the new paradigm of consumer deleveraging and frugality”.  Noting that “the consumer has led 80% of all past post-recession revivals”, he writes:

“Consumer spending was revised down to a 1.7% annual rate from the earlier estimate of 2.0% and the stimulus-led but still rather trepid 2.7% rebound in the third quarter of last year.  What is fascinating is the sector split.  Spending on cyclical durable goods was basically flat on the quarter and down 8% from the pre-recession peak. Curiously, volume spending on less cyclical nondurable goods rose at a 4.1% annual rate – the strongest in three years. Spending on groceries rose at a 5% annual rate, as an example.*

Within services, we saw that housing/utilities posted a 2.4% annualized gain and health care advanced 1.9%, but recreation was down 0.6% (negative now for three straight quarters), restaurants fell 0.8% (down for six consecutive quarters) and both financial services and transportation services were basically flat. This is a picture of a consumer that is still allocating its budget more heavily towards essentials and away from what is non-essential.”

Here is my interpretation of these observations about consumer spending.  Consumers understand what policymakers have not yet grasped.  The financial crisis has fundamentally altered the debt-and-consumption model that has driven the US economy for the past several decades.

The consumer is re-trenching, which is what the federal government should be doing.  Consumers understand that the way forward depends upon savings which leads to investment which in turn leads to the production of useful goods and services.  They understand what policymakers don’t – more debt is not the answer.

*I don’t find this result to be curious at all.  In these tough economic times, consumers are not eating better or eating more.  Spending on groceries and other nondurable goods is rising for one reason – inflation.  Groceries cost more and consumers therefore have to spend more.