Check out this excellent post by the NYT’s Floyd Norris at his blog listing the monthly percentage declines in consumer spending over the past year.
In July—and remember that’s the first month of the third quarter, which is supposed to be the one that returns us to GDP growth—consumer spending got crushed, down 5.9 percent. It would have been far worse but for the cash-for-clunkers program, yet another government program goosing the economy:
But it turns out that all of that improvement comes from a modest increase in auto sales, caused by the “cash-for-clunkers” program. Retail sales excluding cars and gas were down 5.5 percent in July from a year earlier — the largest monthly decline yet.
Consumer spending accounts for more than seventy percent of the economy. You’re just not going to really have recovery until consumers stop sitting on their wallets. But the problem is, those wallets are pretty thin. Trillions of dollars in equity in their homes and stocks have evaporated. Wages are declining. One in six Americans can’t find full-time work. One in ten can’t find any at all. Many of those have been out of work for so long their unemployment benefits are about to expire. What are they going to spend? But the larger point is, for the long-term health of the country, consumers need to save more and spend less anyway. The old economy was unsustainable and structural changes are wrenching.
Another problem, as the Post notes, is that the Fed will have to raise interest rates from zero at some point. That will crimp any potential future growth.
The thing about this story is the situation is even worse than it portrays. There are some serious things missing here, including a nod to the fact that we haven’t really done anything about all the toxic assets on banks’ balance sheets besides let them pretend they’re worth more than they are. The Post touches on commercial real estate but doesn’t really say its collapse is about to go full bore (Fitch predicts up to 15 percent of hotel CMBS, for instance, will be delinquent by year’s end. And it doesn’t mention the ever-rising residential foreclosures, up 32 percent in July from an already high base last July.
But it’s a welcome reality check.
UPDATE: I should note that Irwin’s piece was published yesterday, before stock market tumbles gave the press an easy news peg on the sustainability of any economic uptick—something it should have been on regardless of the market’s direction.