Going forward, it is my very strong belief that the labor market is going to be the key to the re-emergence of consumer spending. This time around, consumer balance sheets are not able to sustain much dissaving (i.e., borrowing from future income). However, consumers can save if income growth comes back. And if the labor market comes back, so too will income growth.
Last week, the BEA reported that salaries and wages grew for the first time since February – with some of that, consumers can increase spending, while at the same time maintain a higher rate of average saving. Of course, the opposite is also true: income growth anew presents a situation where consumers could save even more, i.e., the marginal propensity to save rises – this would wreak havoc, again, on consumer spending.
I tend to “believe” the former (nobody actually knows how consumers will react). But consumption has been pounded in the last year, and I just don’t know how much further it can fall without driving its own demand. Cash for clunkers re-iterated that people want to buy…they might just be smarter about it. It’s all back to income growth.
Consumer-spending-pertinent reports: Claims and Taxes
Initial Claims are still very, very elevated.
The four week moving average of initial unemployment claims turned positive again this week, growing 4,000. In the four full weeks of August (8/8-8/29), average claims rose 3 out-of 4 times. This is not a good sign, and a clear indication that the labor market might be falling less quickly (its second derivative, that is), but certainly not growing. I still expect a pretty big drop in claims going forward and into the fourth quarter of 2009.
The weak labor market is keeping tax receipt growth in negative territory.
Workers are paying less in taxes, which is a slight reprieve, but look for a positive growth in these daily tax receipts to indicate that labor conditions are markedly improving; that hasn’t happened yet. On September 1, the annual growth rate (of the cumulative sum) in tax receipts jumped above zero, but has been below zero for most days since April. Notably, the number of positive growth points in tax receipts, although still few and far between, and are growing in size.