The Impossible Contradictions of U.S. Consumer Spending

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


Consumers are the key to any U.S. economic recovery since they account for around 70% of GDP. Revised 2009 fourth quarter GDP figures just released indicate that consumer spending rose 1.7% on an annualized basis. This was after a reported 3.8% rise in the third quarter. These numbers are certainly good and indicate an economy on the mend if they are accurate. Unfortunately, there is little likelihood that they are.

To spend more money, consumers have to have more money. They can get the extra money through higher compensation (such as wages), larger interest and dividends payments, by drawing down savings or by being given additional credit. All of these numbers for 2009 indicate that consumers had less money to spend. According to BEA (Bureau of Economic Analysis) figures updated as of February 26, 2010 and the latest Federal Reserve credit statistics, the following changes took place during 2009:

Employee Compensation     Down    3.2%
Interest Income                   Down    4.9%
Dividend Income                 Down  16.4%
Revolving Credit                 Down     9.5%
(mostly Credit Cards)

Consumers not only had less income and credit available, they also saved more. The U.S. savings rate went up from 3.8% at the end of 2008 to 4.1% at the end of 2009. So consumers earned less money and then on top of that they saved more of that smaller amount of money. Their borrowing power dropped as well. Yet, while this is happening the government keeps reporting consumer spending is going up. There seems to be some sort of contradiction here.

The recent GDP figures indicate that this mystery can be explained by a huge drop in personal tax payments in 2009. The government claims that individual taxes dropped 25.8% during the year, an amount that is much, much bigger than the decline in income and which occurred during a period when there was no major federal tax cut (there were numerous small ones for certain groups in the stimulus package). The supposed large drop in taxes paid gave U.S.consumers an increase in disposable income. They apparently went out and spent it all immediately.

Based on the above information, there are those who might not believe that U.S. consumer spending is actually increasing. For instance, people who took first grade arithmetic and have at least some minimal attachment to reality are likely to be skeptical. If on the other hand, the average U.S. taxpayer cut their tax bill by 26% last year (presumably a number of people got 30% and even 40% reductions) while experiencing only a small drop of income, I am obviously out of the loop. In that case, please send me the name of your accountant ... unless of course he or she has been indicted or is already in prison.

Disclosure: None

NEXT: Greek Crisis Impacts World Currencies and Gold

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.