The most interesting piece of information in last week’s report of continued slow growth of the U.S. economy in the second quarter was a slowdown in consumer spending.
The increase in consumer expenditures was only 1.8 percent compared with 2.3 percent in the first quarter. Services barely budged at all.
From 1929 through 2012, a period that includes the Great Depression and numerous downturns, the average annual increase was 2.9 percent.
In an economy where more than 70 percent of gross domestic product depends on consumer spending, this is a somber sign. It also carries high stakes for retailers headquartered in the Northwest, such as Nordstrom, Amazon.com, REI, Starbucks and Costco.
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The Conference Board’s Consumer Confidence Index had risen to a five-year high until pulling back in July. Bloomberg’s Consumer Comfort Index, which measures among other things whether people think it’s a good time to buy, had also reached a level not seen since 2008.
But whether these sentiments translate into the consumer boost needed to propel growth to levels more in keeping with previous recoveries is questionable. Consumer spending has risen at a slow rate since the trough of the recession.
“The consumer has been a key to growth in this recovery, but not the leader,” said Rob Haworth, a senior investment strategist with U.S. Bank Wealth Management in Seattle.
High debt continues to hold back spending. Americans shaved $110 billion from their total debt balance in the first quarter, according to the Federal Reserve Bank of New York. But total consumer indebtedness is $11.23 trillion, not much lower than its 2008 peak of $12.7 trillion.
Household debt was less than 70 percent of disposable income in 1980, a scandalously high level at the time. It had reached 130 percent just before the crash and remains about 115 percent.
While Americans wrestle down their debt, they are also struggling with high unemployment, job insecurity and, if they have jobs, wages that are growing slowly if at all. Many recent college graduates are carrying big student-loan burdens and are forced to accept jobs paying less than they did 20 years ago.
Except for persistent unemployment and the outlook for college graduates, these are long-term trends that can be traced back to the 1970s. Globalization, changes in the structure of the economy, technology and industry consolidation are all among the forces that have squeezed households.
Still, that didn’t keep personal consumption expenditures from rising to nearly $9.8 trillion in May from $6 trillion in 1994.
Americans adapted. To keep up the spending, both parents were typically required to get jobs. Lower-paid people took on a second job. As noted, we borrowed at historic levels.
Bubbles generated by the Federal Reserve, Wall Street and the banking sector also helped. This was particularly true of the housing boom, where prices rising at double-digit rates and home-equity loans allowed many to use their house as the means to buy stuff.
Globalization also helped cloak an unsustainable situation. To use one example, the person who lost her decent-paying job when the garment factory closed and moved to Bangladesh, was able to buy plenty of cheap clothes.
It was a rotten trade-off in the long run, but life goes on. Even tectonic changes can be masked by the day to day of working, raising families and being a consumer.
Now the housing sector is healing, but we’re unlikely to ever return to the house-as-piggy-bank era.
So circumstances are changing our behavior whether we like it not. This is shown in the most recent Consumer Expenditure Survey by the U.S. Bureau of Labor Statistics, which goes through June 2012.
The average spending per “consumer unit” — yes, they use that term — increased 1.9 percent from July 2011. But entertainment was flat and spending on apparel slipped.
The average person spent on basics such as transportation, food and health care, along with cash contributions such as child support or help to a college-age child. To our credit, charitable giving also rose.
To be sure, the top cohorts in income continue to do very well and spend.
Canada’s Hudson’s Bay acquiring Saks Fifth Avenue is the latest illustration of the health of the upscale retail sector. (One motivation: Responding to Nordstrom’s planned entry into Canada.)
America remains a wealthy country, and not just the top 1 percent or even 20 percent. Those who retired from good jobs amassed strong savings and have pensions, and can spend on such things as cruises to Alaska and shopping sprees in downtown Seattle.
Their intergenerational wealth transfer to their baby- boomer offspring also bolsters individual prosperity. People are still taking on debt.
Nor did the downturn change some tastes that would have astonished our Depression-era forebears. Starbucks comes to mind, a company that has turned in impressive earnings.
But with slow growth and high inequality, it will be very difficult to sustain the old consumer economy.
In some ways, that’s healthy. We need to be citizens, not consumer units. We need an economy that produces as well as consumes.
And yes, we need to remember that every purchase is a vote, whether to support a local shop, environmentally responsible business or product made under humane conditions.
But because my purchase is your income and vice versa, we are in a consumer economy. So far, it hasn’t found its way back from the recession.
You may reach Jon Talton at email@example.com