Consumer Spending Slows

This morning the U.S. Department of Commerce reported that consumer spending fell 0.2% in June.  Meanwhile, consumer incomes rose 0.1%, and savings rose 5.4%.

Analysis:

All of these data suggest that the economic “game of chicken” between businesses and consumers that I have been talking about for well over a year is in restoration mode – not a good thing.  Even though consumer incomes are rising – a paltry 0.1% – consumer spending fell while savings rose.  This combination is evidence of a consumer that is hunkering down in bunker mode.

Who could blame them?  Businesses continue to sit on huge piles of cash and are not, generally, hiring; while the U.S. government plays its own game of chicken with the fiscal health of the country.

Intuitively speaking, consumers are not in a panic.  But there is a feeling of “we’ve seen this before.”  The “before” is, of course, the Great Recession.

One of the few things that has changed in the last three years is that U.S. consumers have been paying off credit card debt and saving more money.  This will ultimately provide a stronger footing for future economic growth and stability.

But for now, consumers, who make up 70% of U.S. gross domestic product (GDP) are in sideways mode.  What this means is that we are likely to see a flat, to slightly up GDP growth in the third quarter.  That growth, if it pans out, is evidence of an economy flirting with a dip into economic shrinkage; two quarters of that, and you have a double-dip recession.

Importance grade: 8; while important, as I have said many times, consumers are typically a lagging indicator.  The drop in consumer spending in the face of growing consumer incomes represents a choice to spend less money.  So if there is some good news – in the stock market, on the jobs front, or with a U.S. government debt deal – consumers can choose to increase their spending.  In other words, I am attributing the drop to the grim pallor of the news over the last eight weeks.

Jason