Consumer News & Views
In this Issue…
Will 2012 Bring a Brighter Tomorrow? That All
Hinton believes that Scott Hoyt, the senior director of consumer economics for Moody's Analytics, is on the mark in his economic forecast for 2012. Scott is responsible for the firm’s consumer forecasts and analysis. Below is Mr. Hoyt’s summary of where the American economy is going in 2012 and how consumers will fair in the coming months.
Hoyt: The economic data have looked brighter in recent weeks. After decelerating sharply this past spring and summer, U.S. growth appears to have sped up again. Real GDP appears likely to finish the second half of 2011 at a growth pace of 2.5%, near the economy’s potential rate. This is both a relief, as recession risks have receded, and a frustration, as it is not enough to reduce the nation’s painfully high unemployment rate.
Consumer spending has lagged overall economic growth, but the surprise has not been spending’s relative weakness, but its strength. Real spending has been growing at a rate above 2% in recent months while real income has been trending lower, ending October 0.6% below its March level.
As spending growth has exceeded income growth, the saving rate has fallen dramatically, from 5% as recently as June to 3.5% in October. With growth in auto sales and weak wage data, there is little reason to believe the rate rose much in November, moreover.
Consumers are unlikely to keep saving at such a low rate. The Great Recession made clear the danger of relying on household assets to support spending. Confidence, moreover, remains at levels consistent with a deep recession, not modest growth. Such a disconnect is not unprecedented but makes it unlikely that consumers are consciously spending faster than their incomes are growing.
The loss during the Great Recession of 8.75 million jobs and an extended period of nearly double-digit unemployment left the collective U.S. psyche very fragile. Businesses also struggled with policy changes from Washington, led by healthcare and financial regulatory reform. Debates over issues such as immigration, energy and unionization produced no legislation but still left business people nervous.
Pressure on spending
As a result, spending is likely to weaken substantially, at least relative to income, in the next one to two years as consumers put their budgets back on track. We see reasons to believe the imbalance is not as large as it seems, so this adjustment can happen without undermining the outlook, although it is an important reason we expect only modest spending growth in the first half of 2012.
Data questions cloud any analysis of the large drop in saving. Income could be understated, for any of several reasons. First, employment data have tended to be upwardly revised recently, possibly because of growth at smaller firms that do not respond as quickly to government surveys. Supporting this idea, tax withholding data suggest wage income is growing faster than shown by the BEA.
econd, some recent strength in consumer spending may be temporary. Auto spending has contributed an outsize portion of the growth in recent months, as vehicles became more available and incentives after the disasters in Japan cut supply and drove up prices in spring and summer. Nonauto spending has grown nearly 2% all year and has shown no acceleration in recent months. If growth in auto sales slows, the gap with saving could narrow.
Hospital Spending Surges:
In addition, medical spending has recently been an outsize contributor to consumer spending. Real spending on hospital and nursing home services grew in the third quarter of 2011 at a 10.1% annualized rate, the fastest pace since 1995. There was a similar period of very strong growth in hospital spending after the 2001 recession. It seems unlikely this growth will be sustained, if it even survives potential revisions.
Falling debt burdens and increased credit availability are also helping support consumer budgets by providing cash that is not captured in the income data. Federal Reserve figures indicate minimum annual required debt payments declined by about $200 billion from their peak in the second quarter of 2008 through the third quarter of 2011. This amounts to 1.7% of disposable income. While declines have slowed lately, consumers' willingness to spend the money may have increased. In addition, credit is gradually becoming more available. Deleveraging appears to have ended outside of mortgages as consumers increase borrowing faster than they pay off balances or have their debt written off by lenders.
The imbalance between spending and income and the continued weak pace of the recovery mean a slower outlook for consumption growth over the next several months. Spending is expected to reaccelerate later in 2012 as growth improves, but the saving rate is expected to rise as well, even as confidence improves.
Durable goods will lead spending through 2012. Durables are the most cyclical component of spending, as consumers are quicker to cut back on big-ticket items when budgets tighten. Pent-up demand builds, however, and as better times return, so does the desire to make large purchases. In the last recession, spending on durables fell more sharply than on other segments, and it leads the recovery despite supply and credit constraints.
Service spending tends to be the least cyclical component of consumption,
although spending on recreation food services and accommodations do vary with
the business cycle. In the last cycle, even spending on housing services
fluctuated because of the housing component. Service spending fell in 2009,
though less than either durable or nondurable goods. Medical service spending
remains the most stable component of service spending.
He is the lead analyst for CreditForecast.com and is the
editor of ConsumerFlow.com. He has done custom modeling for credit and consumer
sector clients. His areas of expertise include consumer spending, retail sales
and industry performance, consumer credit, and other aspects of consumer
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