Jim Cramer, writing in an op-ed in yesterday’s Wall Street Journal, disparaged the notion that there was anything to fear when it comes to the outlook for consumer spending.
“In 25 years of trading stocks,” Cramer wrote, “I’ve read the consumer’s obituary more times than I care to imagine; each time the facts have proven the obit premature.” He went on to explain, “We are seeing numbers from the major retailers — both high-end and low, mass and teen — so strong that the consumer is not only not dead, but he’s at the peak of health.”
There is no question that Joe and his counterparts across the country are as intent on spending as ever, or so it seems. And while we agree with Cramer that the consumer isn’t dead, that doesn’t mean there are no worries regarding Joe’s spendthrift ways. Indeed, Cramer failed to mention that consumer spending, while it may be eternal, does suffer cycles. Joe’s spending habits, in other words, wax and wane, and the resulting impact on the economy is more than trivial.
History tells the story. Inflation-adjusted personal consumption expenditures (PCE) in the first quarter of 1991, for instance, dropped by 0.4% from the year-earlier level, according to data from the Bureau of Economic Analysis. It’s no accident that the decline accompanied a recession at the time. First-quarter GDP in 1991 was off 1% from a year earlier.
A recovery ensued, and by the late-1990s the PCE in some quarters was advancing at 5% or more over the year-earlier quarter. Again, no one should be surprised to learn that the return of relatively robust spending paralleled an extraordinary period of economic boom.
PCE’s pace has been more middling of late, compared with the highs of the late-1990s. Still, the 3% jump in PCE in this year’s second quarter over the same period in 2005 is nothing to sneeze at.
The point is that while consumer spending is alive and well for the moment, its level and rate of change isn’t written in stone. As the chart below details, the pace of growth in consumer spending continues to fluctuate. And that is the real issue. The reason: consumer spending drives the economy. As a result, a slowdown in consumer spending to, say, 1% in future quarters relative to year-earlier levels may trigger a sharp slowdown in GDP growth, perhaps even bringing recession. And as the chart suggests, such a future isn’t exactly beyond the pale.
Yes, we can all agree that the consumer isn’t dead, nor is he likely to expire anytime soon, if ever. But that’s a false topic of discussion.