Evidence of the game of chicken

Good morning everyone!

Last month I wrote a post entitled “a game of chicken.”  Largely it was my analysis of the economic and financial markets landscape.  This morning brings numerical support of my contention.

Consumer spending grew 0.1% in June, while the incomes of those same consumers did not grow at all; that is, they were flat.  Incomes mostly were flat because private wages and salaries actually fell a little.

Analysis: As you can see consumers are not spending because businesses are neither hiring new workers, or increasing the pay of the workers they do have.  Unless the unemployment rate starts dropping and wages start growing the U.S. economy is going to slip into a vicious circle.  The lynch pin is the fragile mood of the U.S. consumer.  Barring any external shocks to the system, consumers will start to feel some personal equilibrium, if not giddiness.  That should help stabilize the economy.  The good news is that as I peruse the economic landscape it seems that all of the big possible economic shocks have finally been digested and priced into everything.  ‘Everything’ includes that most retarded of external shocks, the BP Gulf of Mexico oil spill.

So, I guess what I am saying is that I am cautiously optimistic.

The next thing to note about the data is that consumers continue to spend basically lock step with their incomes.  This is a far different pattern than the one as we entered this RECESSION.  Then consumers spent more than they earned and in large amounts.  Glutting oneself on debt was the whole reason for the danged recession in the first place.  Not just consumers glutted, but almost every economic participant was digesting a high fat diet (i.e. debt).  Heart attacks ensued all around.

As we entered this recession I wrote way back in 2008 that I hoped that this recession finally would change the behavior of the U.S. consumer to spending only what he/she earned.  I also hoped that folks would start saving money again.  This hope was based on the understanding that as a culture you cannot forever spend more money than you earn without there being dire consequences.  Thankfully, it looks like we are going to exit the downturn having learned some critical lessons.

Importance grade: 5; this data is interesting, but not of the same critical magnitude as consumer confidence, or the unemployment rate.  Yes, consumer spending is very important, but this level of spending was largely expected.

Jason