October 30, 2008
THE DECLINE AND FALL OF CONSUMPTION
This morning's news that third-quarter GDP retreated by 0.3% should surprise no one. This slump is arguably one of most anticipated contractions in recent memory. In any case, the recession is here, although officially the label won't be applied until NBER gets around to reporting what's already obvious. But barring an extraordinary turn of events in Q4--an unlikely event if ever there was one--the recession is here, as we speculated it would be as early as this past March.
Granted, the government will update Q3 GDP two more times before a final print. But there's no reason to think that the revisions won't reveal even bigger pools of red ink.
As for what the Bureau of Economic Analysis reports today, the numbers on their face are humbling. The bad news is grounded in the overwhelmingly dominant piece of GDP: consumer spending, which accounts for roughly 70% of gross domestic product. The point now is plain: Joe Sixpack has finally cut back, and by more than a little. The great engine of the U.S. economy has shifted into reverse in a big way, as our chart below shows, with personal consumption expenditures dropping 3.1% in 2008's Q3 (on a seasonally and inflation-adjusted annualized basis, as per the norm). That's the steepest quarterly decline since 1980's Q2, although 1990's Q4 came close to reaching the latest drop.
There's just no way to sugarcoat this reversal of spending. It's steep and given the general economic and financial backdrop, along with the generally high indebtedness of Americans, it suggests more declines are coming. A generation or more of consuming at any price appears to be at an end, at least for the foreseeable future. Indeed, the chart below suggests the great boom in consumption has, for a time, ended. No, consumers aren't going away. But the extreme consumer age has ended, due for replacement initially by saving and then a more modest strategy for visits to the mall. It'll take time for the American economy to adjust. Ditto for the global economy. The sky-is-the-limit spending mandate of Joe is on hold till further notice. Retrenchment is never easy, but gravity has its way eventually.
Looking closer at consumer spending reveals that the greatest damage came in durable goods, which sunk by a huge 14.1% in Q3. Nondurable goods spending fared better, as you would expect, but only in relative terms. But let's be clear: the 6.4% drop in nondurable goods is troubling since these items include such staples as food, clothing and energy. The fact that nondurable expenditures dropped so precipitously reminds that the extreme negativity in consumer sentiment is taking a toll in the real world.
The other big slice of consumer expenditures--services--managed to eke out a gain in Q3, rising 0.6%. But this is a paltry outing for a sector that's thought to be the most immune to cyclical pain, since it includes such resilient spending sources as medical care and housing. All the more so if you consider that growth in services spending averages more than 2.0% for the last 10 quarters. By that standard, the Q3 reading sends a clear and humbling message of how the average American is thinking these days.
Exports, the great redeeming corner of the economy this year, is still growing, posting a 5.9% jump in Q3. But that's down sharply from Q2's 12.3% surge and is at the lower range of gains in recent years. It's debatable if export growth can hold up in the face of rising economic and financial anxiety in foreign markets. Meanwhile, the dollar has rebounded in the forex markets amid the global rush for the safety of Treasuries, thereby undercutting some of the fuel for exports growth.
No one should be surprised at the GDP numbers today. One could argue, as many do, that the current ills have been years, even decades in the making. But it's the future that matters, and today's GDP report is just another reminder that the economic blowback from the financial crises of the past year has only just begun.
Posted by jp at October 30, 2008 9:32 AM
Why so gloomy? Your chart is actually a great enticement to PUT new money INTO the market since, as the chart shows, historical future returns has been very high after such steep drops in consumer spending.
Posted by: Ember Martin at October 31, 2008 2:31 PM