In my last piece, I noted that excessive optimism or pessimism essentially cancelled each other out over the course of 2011 when tracking the overall economy. The same held true of consumption spending as well:
Since the recession ended, consumer spending has been tracking a slightly slower growth trend than prior to the recession. Again, there looks to have been a long-lasting shock to the path of consumer spending. Interesting changes have occurred underneath the surface, however. The path of spending on services is markedly lower:
This was the subject of a Wall Street Journal article last November:
Increasingly, that means service businesses find it harder to get their share of consumer spending, which is prompting many business owners to scale back. At The Wall Street Journal's CEO Council conference this month, Alan Krueger, chairman of the president's Council of Economic Advisers, highlighted the service sector's central role for jobs growth. "Services account for about half of GDP, and over half of jobs," Mr. Krueger said. "Particularly discretionary services…people have been putting off getting their cars repaired because of concerns about jobs and income growth."
This is certainly something weighing on job growth. That said, consumers are not foregoing all spending. The Wall Street Journal pieces ends with:
Small cutbacks are a big reason Massimo Liguori, owner of Salon Massimo in Connecticut, closed down one of his two locations...In turn, Mr. Liguori said he now goes out to dinner with his wife twice a month or so, compared with at least once a weekend previously. "What happens is you start becoming skeptical of the future," he said...Still, a sense of austerity didn't prevent him from buying a $49,000 Lexus sport-utility vehicle. "A car is different because I put my family in that," he said.
Which brings us to the upturn in durable goods spending:
The rebound in auto sales clearly is supporting this trend. How much of this is pent-up demand that has already been satisfied? How much support will we get from auto sales in 2012? Hopefully enough to match last year's growth, but MarketWatch recently pointed to a troubling sign:
But there’s also some negative news buried in the Conference Board release, and that’s a big drop in the percentage planning to buy an automobile in the next six months. At 9.8%, it’s the worst since October 2010.
One can always discount a single data point, but the decline fits a broader story: Americans needed to buy cars after the Great Recession because theirs were simply getting too long in the tooth.
But this replacement-cycle impact, which has been a tailwind for the likes of General Motors and Ford Motor Co., was bound to end at some point.
Has much of the auto rebound already taken place? How much more can we expect given the vehicle miles driven continues to decline, suggesting existing vehicles will last even longer? Something to think about as we ponder the strength of the economy this year.
Finally, the path of nondurable goods spending has been erratic:
Certainly, the upturn in gas prices played a role in tempering the pace of growth in nondurable spending this year:
The trend of nondruable goods spending is tracking the pre-recession trend. So, at this point, we are seeing overall consumption supported by a rebound in durable goods spending that offsets a deterioration in the path of spending on services. The bounce in durable goods spending will come to an end at some point, as 16 million units is likely an upper bound for auto sales. Will service spending accelerate to compensate? Or will we see a new normal, with a constrained consumer spending at a path and rate below those prior to the recession? I am sympathetic to that outcome, with a corresponding increase in export growth to foster rebalancing of the economy (of course dependent upon growth in the rest of the world, something in question at this point).
But that still is not a story that rapidly returns the economy to potential output. Which brings me back to a familiar place - putting aside the threats to the economy, it is easy to see a positive growth path for the economy, but more difficult to see a rapid closure of the output gap.
