Future Spending Plans
Q3 data shows that personal consumption spending, (inflation adjusted) fell at an annual rate of 2.7% — the biggest fall since Q2 1980. The economy contracted at a rate of 0.5%.
And, as Floyd Norris shows, its likely to get worse:
“Each month, the Conference Board asks Americans about their plans for purchases of major items over the next six months, and people have never been more reluctant to spend.
This month, according to preliminary figures released this week and shown in the accompanying chart, just 1.9 percent of the respondents said they planned to buy a house and only 3.7 percent said they expected to buy a car.
In the more than 40 years that the survey has been conducted, the previous low reading for car purchases was 4.5 percent.
Moreover, the survey also asks whether the person plans to buy a new car or a used one, or is not certain. This month only 1.3 percent said they planned to buy a new car, also the lowest ever.
The home buying figure was not a record low, but it was the lowest since 1982, when interest rates were in double digits amid a deep recession.”
Now, we are always wary of surveys, which tend to be misleading. Humans on this planet are particularly bad at forecasting their own behavior.
But if we look at their actual spending, we see an ugly trend. We may very well still be in the 1st half of the contraction, with the really nasty economic stuff still to come.
This morning’s chart porn:
Chart courtesy of NYT
>
Source:
Americans Have Lost Their Appetite for Spending
FLOYD NORRIS
NYT, November 28, 2008
http://www.nytimes.com/2008/11/29/business/29charts.html
November 29th, 2008 at 8:59 am
The one item generally left out of the survey is one of credit.
Most consumers buy large ticket items (cars, homes, furniture, etc.) on credit. So if credit is reduced or eliminated for consumers, then spending will drop – and not necessarily by choice. Many/most consumers are being told by credit card companies to reduce spending; by lowering limits or raising rates. It is also harder for many people to buy a home or a car – as simply breathing is no longer enough to get a home or auto loan. So not only are people choosing not to spend, in many cases, they cannot due to the lack of affordable credit.
November 29th, 2008 at 9:15 am
Why do I get the impression from this post that real savings and real capital formation are bad things?
November 29th, 2008 at 9:41 am
I wonder if the survey results mirror savings rates? The downtrend in the 80″s occurs as we were building up that wealth in housing value but not the wealth in the bank.
November 29th, 2008 at 9:42 am
“We may very well still be in the 1st half of the contraction, with the really nasty economic stuff still to come.”
D’ya think?
Let’s see …
1) despite several programs designed to restructure troubled mortgages and avoid foreclosure, the bulk of of the at-risk mortgages are still sliding into the chipper.
2) unemployment is definitely on the upswing, and this is during the peak employment, pre-Christmas season. What is U3 likely to attain in the first half of next year? I think that numbers approaching 10% are not that unlikely. Even with Obama’s professed desire to roll out government jobs programs, today’s workers, and today’s jobs tend to be a lot more specialized, and require specialized skill sets, than those of the 1930s.
3) Real personal income has been essentially flat for close to a decade now, while prices have fluctuated wildly. It’s not only businesses that have difficulty forecasting future expenses, individuals are just as confused and uncertain. This does not bode well for making purchases that are not immediately required.
People are (at least at some levels) not idiots, and they see unemployment risks rising sharply, and the daily cost of living as murky and unforeseeable as it is possible to imagine. With the exception of (1), these are not issues that Obama is going to be able to quickly remedy.
Perhaps things may have bottomed by late summer 2009, but they are not likely to recover before late summer 2010, and that assumes the problem of a ginormous housing inventory overhang has been somehow dealt with, and that huge amounts of excess inefficient capacity in the financial and manufacturing industries have been dealt with. Since nobody seems willing to take the failed corporations out back and put them down, it appears that we are destined to slog along the bottom as the Japanese did, for something on the order of a decade.
Investors are not fools either (again, at least on some level), and will not make long-term investments until they can see some light at the end of the tunnel. That tunnel is likely to be both long and dark.
I think that the biggest problem the Obama administration faces is convincing people that there IS light at the end of the tunnel, even if they cannot see it. Until there is hope, people will be hunkered down, locking savings up (and increasing savings, instead of consuming and driving the larger economy) in short-term CDs and money market funds.
This is going to take a VERY long time to get through, assuming that the United States does not go the route of Iceland, which is not as unlikely as it would at first appear, given the mind-blowing commitments that the Bush administration is casually throwing left and right, with the Obama administration preparing to take up where Bush has left off.
The only consistent money that will be made for the next several years is via trading, with the durations of the trades getting smaller and smaller and the gains decreasing also. Eventually, the best returns (best = optimal mix of risk + reward) will be achieved by 90-day (maybe 30-day) CDs and Treasuries (which may well be the same thing, by that time, given the encroachment of federal guarantees into the marketplace). Value investors will become increasingly in vogue, accumulating portfolios of dividend-paying utilities, and squeezing out returns that are marginally better than CDs.
November 29th, 2008 at 10:37 am
I would direct readers wishing to see a little less negative perspective to today’s BP Cafe post by John Maudlin, a first-rate view of a more optimistic future that looks past our current morass.
Thank, Barry — that’s a great holiday post to have on the site.
November 29th, 2008 at 11:04 am
It might be interesting to have a thread on peoples’ thoughts re how the government can get us out of this fix. (I know I have some ideas!) Barry can take what he thinks are the best policy prescriptions and ship them to http://www.change.gov. Obama is looking for new ideas!
November 29th, 2008 at 1:05 pm
Boomer 108 : “how the government can get us out of this fix”
Slowly, gradually and with great patience. Oh wait, this is America…
Research and development is the answer. Instead of a society that creates “wealth” by inflating paper assets, we need to create new knowledge and develop new technologies. But these innovations should be focused on conservation and utilization of resources and not on consumption. We can do this.
If we focus on cheaper, more efficient and less environmentally damaging ways to feed, clothe and transport people and keep them warm and healthy, we will become a truly more prosperous society. Evolving a common sense model where we produce, consume and recycle locally to eliminate unnecessary energy costs will enable more intelligent use of what will become increasingly scarce resources in terms of energy and commodities.
I am not advocating protectionism, but the removal of subsidies that promote waste and misallocation of resources. I think we will see less corn-to-ethanol idiocy and more application of modern technology to solve our problems. Think we can’t build better and safer nuclear power plants, fast and safe rail-based public transportation, and convert automobiles and buses to CNG? All you have to do is look at Japan and some of the Nordic countries – we are living in the Dark Ages here in the U.S.
Let’s build things that are creative, technologically innovative, architecturally attractive and useful. No more shopping malls, no more business schools, no more exurbs, no more “one-stop financial centers”.
I predict that one day the HQ of a major investment bank will be demolished and people will cheer. This has been a dark period in American history.
November 29th, 2008 at 1:58 pm
Right on, Leftback.
However, many of those things you mention take true vision, leadership, time, patience, a collective will & perserverance, and above all, solid execution. Are we as a culture (of uber-instant gratification & “free lunches”) capable anymore? That, to me, is the million, no trillion, dollar question.
November 29th, 2008 at 2:29 pm
If the price is right, I’ll buy a new car in 2009.
And, of course, I’ll want zero percent financing.
November 29th, 2008 at 2:46 pm
lb,
no doubt that you’re presenting the proper course for a constructive way forward, though, many of the things that you’re alluding to have been well-know, and well-proven, oftentimes, for decades. We should really be Researching why we haven’t been allowed to Develop them..
the short answer is: Our Economy is predicated upon Waste to entrench socio-economic divisions within it..IOW, on this Plan-tation, We’ve been kept as Slaves..
Grimly, though, there’s, as always, been more Slaves than the Master has bullets. We, per usual, are our own best keeper~~ “None more hopelessly enslaved than those who falsely believe they are Free.”
http://www.icerocket.com/search?tab=web&fr=h&q=None+more+hopelessly+enslaved+&x=41&y=13
November 29th, 2008 at 10:13 pm
@LB, great post. I agree completely with your assessment and I suspect Obama and friends do too.
@Mark, it will be interesting to see how far O gets with his change that I assume would be in the direction LB outlines. If you are right, he will be prevented from doing so. If you are wrong, then we may finally begin to move in a more enlightened direction. Perhaps I am just a naïve rube, but I am expecting the latter. Wish him / us luck.
November 29th, 2008 at 10:20 pm
@Mark, To follow your point, I intended, but then failed, to add the word “free”: If you are wrong, then perhaps we will finally begin to move in a more enlightened (free) direction.
What chance do you give us / him, less than 1%?
November 29th, 2008 at 10:40 pm
1932-1940 were very bad years for the economy … yet the stock market more than doubled. Go figure.
November 29th, 2008 at 11:27 pm
RAA,
it would have had to just to break even from FDR’s, in ‘33, 40% devaluation of the U$D.
KJ,
speaking of FDR, with him, we’ve been on the Express Train, of Federal Totalitarianism, with a One-Way ticket.
The last President that tried to switch us from the track, never left Dallas –22 Nov 63.
Change, if any is to, ever, come, is going to, as always, have to come from the bottom.
Need we be reminded that our Constitutional Republic was ordered: Individual, State, Federal?
That pyramid has been inverted..
Speaking of Obama, let’s see if he unwinds The P*triot Act, the many, surreal, provisions of the John Warner Defense Authorization Act, and/or the multitude of other Executive abuses that have accumulated, like scrub brush, over the last ~75 years.
Simply KJ, now is no time to be find out, ex post, whether one is a ‘naive rube’, if one suspects there are important operating aspects that one may not be aware of, it is time for further study..
btw, just to let you know, when you used ‘enlightened’, in your first post, I saw that as covering ‘free’, as well..
November 30th, 2008 at 6:53 pm
@MEH
Remember, remember, the 5th of November.
http://www.youtube.com/watch?v=hBM7B3NwBtw&feature=related