Less Credit and Income = More 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.


As of June, consumer borrowing has now dropped 16 out of the last 17 months. Credit Card debt has fallen 21 months in a row. The personal savings rate in June rose to 6.4% from 2.1% before the recession began. Wages and Salaries are down 3.6% in the last two and half years. Despite decreased credit and income and increased savings, all three of which are negatives for consumer spending, GDP figures claim American consumers are buying more.

U.S. GDP growth has been fueled by consumer borrowing for many years. Consumer credit grew faster than GDP before the Credit Crisis hit, but is now moving in reverse.  June 2010 total credit card debt (revolving credit) has now fallen below the November 2005 level. American consumers over the decades have accumulated far too much debt and deleveraging is a trend that is likely to go on for many years. This is certainly a negative for an economy that has been built on consumer spending. Even with consumer credit staying steady, it would be hard for the GDP to rise.

The reduction in consumer borrowing is not a voluntary process. The big banks are cutting credit limits, cancelling cards and demanding pay downs. Consumers are choosing to save more though. The savings rate was only 2.1% in 2007. Then it was 4.1% in 2008 and 5.9% in 2009. It was 6.0% or over each month of the second quarter of 2010. More savings means less consumer spending and this trend is likely to continue as long as consumers feel insecure about the economy.

According to the BEA (Bureau of Economic Analysis), wages and salaries of U.S. workers have declined only 3.6% since the first quarter of 2008. This small drop is really surprising considering the unemployment rate was 5.0% in December 2007 and was 9.5% in July 2010. More government jobs and government subsidized jobs prevented this number from being much worse.

Even more amazing, total personal income actually increased by 1.5% during this time. How is this possible during a recession?  Examining the figures indicates that there was a 27% increase in 'Government Social Benefits to Persons' in the last nine quarters. These various forms of stimulus payments, which are essentially welfare, along with government subsidized employment, were paid for by the approximately $3.5 trillion in deficit spending in 2008, 2009, and 2010. This has been the major source of funds for consumer spending recently.

So even though consumers have been borrowing less, the government has been borrowing more and giving the money to consumers to spend (or at least to some consumers). This is equivalent to the 'bread and circus' of Roman times. It is not a sustainable model for economic growth. Nor is it even honest to claim that this is actually economic growth. We don't exactly live in an age of financial honesty however - and that is another trend that can be expected to continue.

Some of the data for this article can be found at: http://www.bea.gov/national/nipaweb/TableView.aspSelectedTable=58&Freq=Qtr&FirstYear=2008&LastYear=2010).

Disclosure: No positions.

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

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.