Consumer spending will rebound

One of the largest trends that I have been tracking since the beginning of the economic downturn is consumer spending.  Lining the storm clouds with silver has been that the U.S. consumer has learned or remembered how to save money.  And here I am not talking about socking money away in a retirement account.  I am talking about finding a way to buy something without having to finance the purchase.  In other words, cash!

This is a very important trend.  In the lead up to the recession your average fellow U.S. citizen was a net spender.  That is, they spent more than they earned.  Clearly that is not a sustainable future for any country as the difference between spending and earning has to be made up by financing.  That made the entire economy vulnerable and gave it clay feet.

Yet too much saving meant that the economy had to find a way to grow again without relying upon the consumer.  This may not sound like a big deal, but it is one of the sources of the stubbornly high unemployment rate.  Not only that, but to have the same growth without as much consumer participation required one of the following:

• Higher government spending – not a good thing when government is already themselves in a deficit situation
• Improved exports – this would be great for the economy, but very difficult to accomplish since the U.S. is not much of a manufacturer any longer
• More investment by business – in other words, investment in either new, innovative products or in increased inventories; the former is clearly the preference, but that kind of innovation takes time

In fact, the economy is at levels exceeding the pre-recession levels.  But that has primarily been done through increased government spending and by businesses re-building very stripped bare inventories done in anticipation of the U.S. consumer returning to his/her spendthrift ways.

But it is my feeling now that we are entering a nearly perfect environment: a consumer who has learned to manage her/his finances, but also is comfortable buying things again.

I would expect by the end of the second quarter we will see a healthy increase in consumer spending.

Jason