What’s Wrong with This Economy, Part 2

July 17th, 2011 at 4:59 pm

David Leonhardt has an interesting piece in today’s NYT pointing out the much-larger-than-usual decline in consumer spending in this relative to past downturns.

In an economy that’s 70% consumption, that’s an important reason why we’re stuck in neutral.  But David L intimates that this decline in consumption is structural not cyclical (“The old consumer economy is gone, and it’s not coming back.”)

I’m not so sure.  Seems to me that for the structural call to be true you’d want to see at least the beginning of a change in the consumption share of GDP, and that hasn’t happened.

Source: BEA

The figure shows, in fact, that consumption as a share of GDP, was 71.1% most recently, tied for the highest share on record, with data going back to the 1930s.  Doesn’t mean the NYT is wrong, but it’s probably too soon to assert a structural shift.

What gives?  How could the large declines David L finds comport with the elevated share?  It must be that the fall in consumer spending is proportionate to the decline in GDP.

If you want to see a structural change by my definition—one significantly and lastingly altered as a share of the economy—look at investment resident housing.  That’s averaged about 5% forever, but as you can see, it did a total cliff-dive with the bursting of the housing bubble.  My guess is it will be a while before that share climbs back to historical levels.

Source: BEA

Two more observations about this.  One, the second figure shows that the housing bust is largely behind us in that this share, bound by zero, can’t fall much further.  That doesn’t mean we get the boost we need from a normal housing market coming out of slump, where low interest rates trigger new buying.  It does mean we get less of a drag from the sector.

Second, regardless of GDP shares, David L’s punchline is exactly right—consumer spending is way down and it’s not getting much of a boost from jobs and paychecks.  Which means that fiscal stimulus is about the only game in town, or it would be if policy makers weren’t spending practically every waking minute on budget cuts.


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10 comments in reply to "What’s Wrong with This Economy, Part 2"

  1. Geoff Freedman says:

    I think the article is dead on, and I think he’s right in that we have some real structural problems. I don’t think the majority of the jobs lost in the last downturn where that great to begin with, mostly service oriented mid level jobs. We need to create new industries, and retrain people. Our education and retraining is woefully inadequate right now.

    From what I understand, consumption has increased from 65% to 70% in the last 10 years. Wages for the middle class and working class have been stalled for many years now. In order to keep up living standards people engaged in deficit spending or drew equuity from their house. The housing market may have bottomed out, but I don’t know too many people who have incentives to spend when they are underwater in their mortgages, now that housing values have declined. At least that’s what it’s like where I live right now.

    From what I’ve read, household debt is at 115% of after tax income now, down from 130%, and back to the level of 2006. Also 80% of the population now have only 15% of aggregate net worth, so how is the consumer going to spend anything beyond the necessities of life when as a group their resources are quite limited?

    Business isn’t going to invest in expansion unless they are fairly certain that demand is going to be there and there are currently no signs of this. There may be some truth to the notion that business doesn’t like the direction of regulation and the uncertainty of where (and what) reforms will lead, but the biggest uncertainty at least for me, is the toxic, adversarial and down right irrational discussions going on now in our goverment, including all the discussions about the debt. But if the demand where there and I could make it work even in this toxic environment.

    I am the small business owner you quoted once before, and I can tell that my wife and I had planned a small expansion, but I told her I’m not willing to do anything right now until I see how some of the politics plays out, and I am confident that I can trust our government to make policy decisions, rather than political ones. Frankly what’s going on right in Washington now has scared the bejesus out of me.

    It’s too bad we can’t see that as a nation we are all sailing in the same boat, and make decisions that are best for everyone.

  2. denim says:

    “What’s Wrong with This Economy”?
    The customers have run out of money and credit. My advice to friends would be to pay off revolving credit so that astounding interest payments disappear from their budgeted expenses. That would be like a raise in pay. Then only pay cash for new purchases. Those who are well off don’t need my advice…but they could buy a car, yacht, and new home or two.

  3. comma1 says:

    Why is investment in housing as percent of GDP bound by zero? I’m no economist, but if housing values are dropping like a rock what is to stop it from going below zero, and thus, being negative? (For instance, when a house is under water, and the value of that house is net negative for the homeowner – in other words, the house is worth less than the mortgage.)My stupid layman brain tells me that housing investment can be below the lower bound if there is a massive drop in real estate… or bursting of a bubble.

    • Jared Bernstein says:

      An excellent and thoughtful question…you are no “stupid layman!”

      But in our national accounts, we measure investment in housing as the value of construction–what it costs to build the home. Here’s how the statistical agency describes it:

      “For structures, the…estimates are primarily based on detailed value-put-in-place data from the Census Bureau’s monthly survey of construction spending. The “value of construction put in place” is defined as the value of construction installed or erected at the construction site during a given period, regardless of when the work on the project was started or completed, when the structure was sold or delivered, or when payment for the structure was made.”

      What you’re referring to–home prices rising and falling–is a change in wealth of the homeowner herself–as the value of her asset ebbs and flows. That’s not GDP, which omits changes in asset values like that (ie, capital gains/losses). GDP is designed to pick up investment flows, like home building, and the runup and crash in the graph looks to me like it does a good job of it.

  4. Khadijah says:

    There is a general rule that must be adhered to when suggesting policy solutions.

    It must be politically palatable.

    More stimulus is not. Keynesians like Bernstein all seem to gloss over the fact that (1) Keynes assumed that nations would pay off the debt they incurred during a recession, and would be entering the next recession with (at least) a balanced budget, and (2) Keynes was also dead set against debasing the currency.

    The solution to all the problems posed is to find ways to increase the amount of money the consumer has for discretionary spending. The only way the government can stimulate that is to cut taxation; and the only taxpayers who would respond immediately to a marginal rate tax cut would be the middle class and above (e.g., “the rich”).

    That’s not what Washington is talking about.


  5. LMADster says:

    The US cannot rely on domestic consumers to pull us out of the multiple messes we are in. Fiscal stimulus is powerless to pull us out of self-inflicted structural wounds.

    The Conrad plan? The Ryan Roadmap? Obama’s outline? Bowles-Simpson? These plans reduce the deficit only $4 trillion, at best (and even that is BS). But they still add $6 trillion! It doesn’t matter which plan wins, America still loses. Both parties are simply competing to see who can BEST MANAGE America’s decline.

    But there is a plan that manages America’s resurgence to the point of making this century The Second American Century: the LMAD Plan as described in Jon Mitchell’s timely book “Let’s Make A Deal: A Hail Mary Pass to Get America Off the Bench and Back in the Game.”

    Mitchell sees those multiple messes to be basically a once-in-a-hundred-year opportunity. Healthcare-for-All? It’s in there. Balanced budget? It’s in there. Carbon tax? It’s in there. Rational taxation? Amnesty? Border Security? Limited government? Social Security and Medicare solvency? It’s all in there; it’s all paid for and it’s all optimized to grow the US economy in these austere times.

    The LMAD plan uses a $600 billion/ year carbon tax NOT to fight global warming BUT to BUY off Liberals. And that’s just the start… LMAD also adds fully-funded Healthcare for every American, a public option health insurance entity, and the implementation of tax schemes frequently advocated by Liberals such as a “sugar” tax and a value-added tax. The LMAD plan even grants overnight amnesty of 10 million illegal aliens.

    THEN LMAD buys off Conservatives with much more than a balanced budget and limited government ; it permanently ends future illegal immigration with zero-tolerance, adds tort reform and completely replaces all taxes on production, labor, saving and investment with the new carbon tax, the value-added tax and the sugar tax. The LMAD plan even removes the burden of healthcare expenses from corporate balance sheets by ending our reliance on employer-provided health insurance.

    It’s time for progressives concerned about rising temperatures and conservatives concerned about rising federal debt to realize the obvious: they need to BUY each other off in order to effectively address their pet ideological concerns-there is no other way. This means trading, among other things, a carbon tax for a balanced budget amendment and a more limited government. This plan is outlined at http://letsmakeadeal-thebook.com

    Plan Blog: letsmakeadeal-thebook.com/

    Facebook: facebook.com/pages/Lets-Make-A-Deal-The-Book/143298165732386

    Twitter: twitter.com/#!/lmadster

    Or just Google “LMADster” for more info.

    • Devin M says:

      Sounds great…but I don’t think it’s politically viable.

      Today’s breed of conservative is cut from a different cloth and can’t simply be “bought off.” In discussions I’ve had with the modern right, they are not open to any sort of compromise or deal. I readily agree that taxes on labor are way too high–we currently tax labor at a higher rate than absolutely any other activity. But when I propose trading off much lower taxes on labor for higher taxes on pollution or dead people (i.e. returning the estate tax to rates of several decades ago), they’ll have none of it. They’d rather protect the income of polluters and dead people at the expense of labor than make any sort of deal. It’s sheer insanity…and apparently it controls one of only two viable political parties we have.

  6. John says:

    I wonder what you’d see if you remove debt spending from your data – if you can. I suspect you’d not see the same trend. I have no idea what older data was, e.g., as far back as ’65, but debt has been over 100% of income recently, and it would be interesting to see what your graph would look like had spending been limited to income.

    I.e., consider not just what consumers want or need to do as expressed in actual spending, but what they are able to do long term, considering income. Life in the US is expensive, and lots of spending is simply mandatory, whether income is sufficient or not. If it’s not, it’s not sustainable longer term. If spending has been increasingly debt spending, it might give you a different sense of the data.

    71% / 115% (using Freedman’s data above) would be ~62% non-debt spending, which puts you back at late ’60’s level. If that’s trend, it’s been flat or declining, not increasing at all. And prior years might have had positive savings, which should also be considered, and would suggest it’s declined even more.

  7. Virgil Bierschwale says:

    If we look at durable, nondurable and services, we see a different picture


    They are spending on services, which I believe is comprised of medical services among other things, yet durable and nondurable are not doing much.

    One of these days you folks, and especially you jared are going to open your eyes and realize that consumer spending can still go up.

    Think about it this way, you lose one 70,000 job and the poor guy or gal is now working two 35,000 jobs trying to survive.

    Dollar for dollar, the same amount of money is still changing hands, BUT we are now having a hard time finding the low paying jobs too that will allow a person to try to stay afloat, which tells me that we are going to be experiencing the next wave lower, especially when we consider that we are now laying off our school teachers, government employees, etc as they have no where to go.

  8. Joseph Patrick Bulko MBA says:

    Here’s my take on the slump in consumer spending, high unemployment, and related hardship:

    As the tepid “recovery” fizzles to a stall, the U.S. economy seems to be working reasonably well for about 75 percent of the available workforce. The “other” 25 percent consists of the unemployed (e.g., those who are collecting unemployment benefits), the underemployed (e.g., those forced to work part-time when they need full-time employment), the non-employed (those who have dropped out of the employment market and are no longer counted as unemployed), and the working poor (e.g., the vast underclass of all those people working full-time dead-end very low-paying jobs while trying to support families). For some of us, this 75 percent “success” rate is simply not good enough! We need a better jobs solution!

    I’ve written a proposal that describes a mechanism through which we can fund a massive number of new business ventures by tapping the financial power of Wall Street to create jobs on Main Street. This approach ramps up employment quickly and puts money directly into the hands of the people who need it now: the consumers (whose spending represents 70 percent of GDP). This enormous financial turbo-boost to the economy will reinvigorate economic activity and quickly return the eight million jobs lost during the Great Recession. The purpose of this mechanism is to take a private-sector proactive approach to address the expected long-term high unemployment problem.

    You can read the proposal (“A Modest Proposal to Save the American Economy: Entrepreneurial Blitzkrieg as Job Creation Vehicle”) and its companion piece (“The 75 Percent Solution? A Moral and Economic Imperative to Create Good Jobs NOW!”) here: http://jpbulko.newsvine.com/

    Joseph Patrick Bulko, MBA