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In the Nation's Interest

The Consumption Story:  Weather, Whether, Whither, Wither

Weather:  Can we blame it for the dampening of consumer spending in the first quarter?  (What are the short-term factors and anomalies affecting consumption?)

Whether:  Do we know whether consumption is recovering along with the rest of the economy? (What is the medium-term outlook for consumption explained by the business-cycle recovery from the Great Recession?)

Whither (…and even Wither!):  Whither (or what is happening to) the American “Big Spender” and “Consumer of Things”?  Is he or she “shriveling up”?  (What are the longer-term trends in consumption in our “new normal” as explained by demographic factors and the deleveraging of the private economy?)

March Retail Sales Report – came out yesterday; overall retail sales ($441.4 billion) were up 0.9% from February, just below expectation of 1.0%  But excluding motor vehicles sales, retail sales were up only 0.4% (and had been expected to be +0.7%).  Compared with a year ago (March 2014), monthly sales were just 1.3% higher, and quarterly sales (1st Q to 1st Q) were up just 2.2%.

• Economists considered this to be fairly positive, but not good enough to blame the weather alone for February’s decline (of 0.5%).
• Besides motor vehicles dealers (+2.8% from February), other sectors that did well were building materials suppliers (+2.1%) and furniture stores (+1.4%).
• Compared with a year ago, the sectors that saw the greatest increase in retail sales were food services & drinking places (+7.7%), building materials (+6.3%), and motor vehicles dealers (+5.8%).
• Interesting tidbit:  it appears that for the first time ever, people spent more eating out (spending at restaurants and bars, $50.4 billion in March) than eating in (purchases from grocery stores, $50.1 billion).

Weather factor:  because the March report was not that strong and the weather in March not so awful (the “weather card” has been played), bad weather cannot explain all of the weakness in first quarter retail sales.  It certainly cannot explain why certain segments of the market (auto sales, restaurants) achieved such positive results while others saw continued weakness.

Whether factor:  analysts have been puzzled as to why consumers aren’t spending more given that low gas prices have put more money in their wallets and that the job market continues to improve (albeit more weakly than expected in March).  According to The Conference Board, consumer confidence in the economic outlook improved in March, although consumers’ assessment of current conditions worsened.  Although the March employment report was generally disappointing, wage growth did exceed expectations.  So from a medium-term business cycle perspective, a lack of consumer confidence and stagnant wages can’t fully explain weaker than expected consumer spending.

Whither-and-Wither factor:  which leaves the unexplained to ask the “whither” question about, which asks where the “new normal” of the economy will settle after we are fully recovered.  As I wrote about in a CED blog last month, there’s evidence that U.S. consumers are changing their spending habits, both because the same old people (i.e., baby boomers) have changed having gone through the credit crisis and Great Recession, and because there are new, younger participants in the economy now, who just aren’t as into consuming as the old ones were at the same age.  This shows up in the overall level of consumption as a share of personal incomes, and in the mix of goods and services people buy.  Personal consumption expenditures still contribute almost 70% (68.5% in 2014:Q4) towards GDP, but that share has been flat or even declining since early 2011 (when it was 69.1%), and the services component has risen while the durable goods component has fallen—indicating that today’s consumer may be more into buying “experiences” than buying “things.”  Most of the insights on the generational story are anecdotal, but I can vouch from my own personal experience that my Millennials kids in their 20s are far less interested in buying cars and homes and even electronics, than I was at their age.  They want to postpone marriage and having kids, stay unencumbered and mobile, rent apartments in the city rather than buy houses in the suburbs, take Uber or borrow a Zip car instead of owning their own car, and use their very portable iPhones or tablets as their entire technology and entertainment systems.  And at the same time that the baby boomers (who are approaching or already in retirement) are downsizing, their grown-up Millennials kids aren’t taking over their housing or their big “stuff.”  (Note this Washington Post story which highlights this phenomenon.)  Even the baby boomer parents are starting to emulate their Millennials kids in this “buying of experiences” more than “things” regard—perhaps as a way of staying young!  So there’s sort of a confluence of downsizing happening in the economy, which means even when the economy has fully recovered from the Great Recession in terms of jobs and incomes, it’s likely that the level and mix of consumption in the economy in the “new normal” will not look the same as it did in the “last normal.”  Consumption will have “withered” somewhat even if the economy is strong.

That the “new normal” will not likely look the same as the “old normal” shouldn’t be interpreted as a bad thing, however.  The credit crisis that precipitated the Great Recession was largely driven by the overextension of households in terms of their mortgage debt, and that debt had supported not just excessive housing consumption but excessive personal consumption more generally.  People felt richer than they really were (so there was high demand for credit), and banks were willing to lend people lots of money to spend on lots of different things (so there was high supply of credit), both based on home equity, which turned out to be unreliable.  The credit crisis was a “wake up call” of sorts to households and businesses and likely explains why the private sector has “deleveraged” (reduced debt) substantially since.  And that increase in private saving is certainly a positive factor for the longer-term economy.  Now if we could only get the public sector to follow the private sector’s lead.


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