Friday, December 26, 2008
Consumers have been under extreme duress throughout 2008. Energy prices surged on oil until it fell below $100/bbl in September, which is the month when the labor market took a significant turn for the worse, and the housing market continues to tumble. Not surprisingly, consumers are pulling back. They would have pulled back more were it not for those credit cards, and the decline may continue for two more quarters (three consecutive quarters), making the 2008-2009 contraction in consumer spending the longest since WWII.
(Click to enlarge chart)
The chart illustrates annualized real personal consumer spending (PCE) growth on a quarterly basis spanning the years 1947:1 to 2009:2 and includes the following forecast: 2008:3, -3.8%; 2009:1, -2.6%; 2009:2, -0.1%. Since 1947, this would mark the first time that consumer spending fell three consecutive quarters.
It is remarkable that the depth of the decline in consumer spending does not make history as well. The forecasted accumulated loss of 1.1% (not annualized) is smaller than the 2.4% that occurred in Q1 and Q2 of 1980, when real PCE fell by an annualized 8.6% in the second quarter. Nevertheless, consumers are cutting back, and will continue to do so into 2009. Note: an annualized growth rate is the annual rate of growth that would occur if each quarter averaged the same amount of quarterly growth. The accumulated growth is the total reduction in spending over the consecutive quarters of PCE decline (the total % loss over Q1 and Q2 in 1980 for example).
Consumers are stressed in 2008 and 2009
Prices, labor, and housing have kept consumers on edge. Oil hit its peak in July and remained above $100/bbl throughout September. Energy prices seriously restricted consumer purchasing power, and spending was cut (reluctantly). Since September, job loss has quickened. The carnage that occurred in the labor and housing markets – around 1.3 million jobs lost since September and the ongoing destruction of housing wealth - is passing through to consumer spending. Consumers are getting a break at the pump – oil was just $34/bbl ending on 12/19/08 – but that is only a minor offset the negative forces currently underway.
Prices played their part
This chart illustrates monthly nominal and real PCE growth from January 2007 to November 2008. In the spring of 2008, nominal and real PCE growth turned negative on average. This was a sharp turn for the worse relative to the average positive PCE growth in 2007.
Seesawing prices have certainly played their part. From January 2008 through August 2008, real PCE growth was greater (less negative) than nominal PCE growth because prices were rising quickly and consumers were holding on as best they could. Since September, weak economic conditions and a masive job loss have driven down headline prices (-1.7% in November), and real PCE gains were smaller than expected. Nominal spending dropped relative to real spending, which grew just 0.6% on the sharp price declines (PCE price index fell 1.1%). Whatever the underlying catalyst, consumers are cutting back hard.
Why has consumer spending not fallen by more? Credit cards
This chart illustrates consumer bank lending, credit card and other (non-revolving) loans, since Christmas of last year. During the first half of 2008 through June, revolving credit was rather stable and other consumer loans were growing. However, since July revolving credit has surged, and other consumer credit has stabilized, if not declined. Many consumers are living on their credit cards, and have been since July.
It is possible that consumer credit takes a stochastic tumble, which would drag down the forecast of consumer spending (see forecast chart above).
Consumers are in trouble. The economy is in trouble. No wonder SpendingPulse called the 2008 holiday shopping climate one of the worst in modern times. It is not surprising that consumers are cutting back: prices, credit, labor, and housing have wreaked havoc on consumer spending. But this cutback is setting up to be the worst in modern history.