This morning's Wall Street Journal contains a front page story on the state of the American consumer:
U.S. consumer spending, a rare pillar of economic strength in recent months, is showing signs of weakening.
American consumers helped carry the economy through a spring slowdown and appeared to power a summer resurgence in growth. But in recent weeks government data have shown spending was slower over the summer than previously believed, and it has started off the final three months of the year on an even weaker footing.
This, I think, is a charitable interpretation of the consumer situation up until now. I am not sure who exactly believed that the US consumer is a "rare pillar of economic strength," but I suspect they were somewhat delusional and perhaps overemphasizing the importance of consumer confidence surveys. I don't think the consumer is falling off the cliff, fiscal or otherwise, just yet, but household spending hasn't been exactly a source of strength for several months now. The fragility of the sector is not new.
Begin with a quick look at core retail sales:
The October figure can be discounted as a artifact of Sandy. And even if not, by itself the decline is hardly out of line with monthly fluctuations in the series. On a three month basis, core sales have also been within their past range:
The soft spot earlier this year, however, did put in place a more worrisome trend:
On this basis, consumer spending lost momentum in April. So why is spending believed to be an economic pillar? I think the rebound of consumer sentiment fostered this view. From the article:
On Friday, a preliminary December measure of consumer sentiment from the University of Michigan tumbled to its lowest level since August after four months of gains.
"It was a dramatic drop," said Jacob Oubina, senior U.S. economist for RBC Capital Markets. "The consumer's not all of a sudden going to pick up the baton."
But as I have explained previously, at best sentiment rose to where it would be expected to be based on its past relationship with spending:
Sentiment has not been an accurate indicator of spending since 2010, consistently lower than would be expected. Note also that real PCE lost momentum at the beginning of 2011, much earlier than core retail sales. Of course, "momentum" is a matter of opinion. Spending never came close to regaining its pre-recession trend:
By major component:
Of the three components, durable goods has most closely regained its previous growth rate, but not the trend. And even its growth rate is in question as the replacement cycle for cars and light trucks comes to end; sales are closing in on the pre-recession levels in the auto sector.
So why isn't spending surging? Why aren't low interest rate powering spending? After all, by some measures households are more capable of supporting additional debt than they have been in years:
But households remain in a deleveraging phase:
As part of that deleveraging, note that home mortgage withdraw remains sharply negative - see Calculated Risk. With households still deleveraging, spending is dependent on job and wage growth. And we pretty much know that neither of those two factors are supporting runaway consumer spending anytime soon.
So I think consumer vulnerability has been evident for months, that this is not in any way a recent event, and that it will continue until deleveraging comes to a halt or if job and wage growth suddenly surge. And that vulnerability is aggravated by the fiscal cliff concerns. One way or another, fiscal policy will be tighter next year. Congress is debating the shape and depth of that tightening. Another way to think about it is that fiscal policy will turn toward deleveraging while the household sector continues to delever. I think fiscal policy should refrain from deleveraging until the private sector is ready to relever. When will that be? Jan Hatzius of Goldman Sachs expects that releveraging to begin in the second half of 2013 - see his interview with Joe Weisenthal. If so, then the first half of 2013 will be stormy, but the sky will clear toward the end of the year and into 2014.
Of course, the alternative is that the combination of fiscal and household deleveraging is more severe than anticipated. Perhaps fiscal mutlipliers are greater than expected, as just might be the case at the zero bound. Then the first half of 2013 is much choppier than anticipated, undermining stronger growth forecasts for the second half of the year. In which case the turn to fiscal austerity will be deemed ill-timed at best.
Bottom Line: I don't think that consumer spending has suddenly decelerated, but I never thought it suddenly accelerated either. It has been vulnerable for many months, and will remain vulnerable for many more. Vulnerable does not mean apocalyptic; all else equal, I would expect consumer spending to grind along as it has been for much of the year. That said, even grinding along is at risk in the face of fiscal austerity.
