What Recovery? Depressed Consumers Cut Spending

Back in April, when the comprehensive GDP data for the first quarter of this year came out, I noted that

year-to-year inflation-adjusted growth is down. In the first quarter of 2011 the U.S. economy grew by 2.2 percent over the first quarter of 2010. In Q1 of 2012 the year-to-year growth rate is 2.1 percent. If Obama’s recovery policy had worked and put us on a traditional recovery path, we should have at 3+ percent growth by now. We are at the very least one full percentage point below where we should be, provided again that we were on a recovery path. Since the GDP growth rate has actually slowed down marginally, we now have yet another round of GDP data that confirms the utter failure of the Obama administration’s anti-recession policies.

Today we have the comprehensive GDP data for the second quarter of 2012 – and it is not much better news for the Obama administration. Compared to the second quarter of 2011, GDP has grown by 2.3 percent (adjusted for inflation) which, admittedly, is up compared to a year earlier (1.2 percent in Q2 of ’11 over Q2 in ’10). However, not only is the rate at least a full percent below where it should be if we were in a recovery, but it is also driven by the “wrong” variables. For an economy to be in recovery mode, private consumption must show signs of consumer confidence; today’s GDP numbers show the exact opposite.

Again, the key indicator of whether or not we are in a domestic recovery is showing the exact opposite: private consumption is still growing, but the rate is slowing down. From Q2 in 2010 to Q2 in 2011 consumption grew at 2.7 percent; today, a year later, the growth rate is down to 1.9 percent (again adjusted for inflation).

There is more to show that consumers are getting more pessimistic about the future. Spending on non-durable goods has come to a virtual standstill. Growing at only 0.9 percent year-to-year, this variable shows that consumers are doing their best to reduce their daily cost of living. Non-durable goods are food, gasoline, clothes and other frequent-expense items. When consumers cut spending there, it means that they feel their private finances are under pressure. That pressure comes either from higher cost of living – inflation or taxes – or from more uncertainty about the future of their earnings.

This is the second quarter in a row that year-to-year data shows the same kind of weakening in daily consumer spending. There is no doubt that the economy is going the wrong way. Furthermore, because consumers are pessimistic, we can expect a decline later in the year in other consumer spending as well, such as on durable goods. That does not bode well for those in the Obama administration who want Americans to buy more Chevrolet Volts.

Consumer spending is 71 percent of GDP. With that big a chunk of the economy in recession mode, it is a safe bet that if Romney wins the election, he will inherit not just a weak, but a weakening economy.

To further illustrate the fragility of the tepid growth that we actually have, consider the fact that business investments are up by 11.6 percent over second quarter last year. This is much higher than the growth rate a year before of 3.9 percent. You would think that this is a good sign (and if you are an Austrian economist you are jumping up and down with joy right now) but it is basically nothing more than the usually delayed reaction to last year’s growth spurt in exports. A year ago the Bureau of Economic Analysis reported that gross exports (not deducting imports) had grown by 6.8 percent over second quarter 2010, a solid $121 billion rise in overseas sales by American businesses. Today’s export growth is down to 4.5 percent. That is still a high number, but it also reflects the weakening economies in Europe and East Asia (which, by the way, we are not at war with).

The increase in investments is an accelerator effect of the export increase in 2011. If the weakening trend in export growth continues and turns negative, we will experience a drop in investments with a 4-6 quarter lag, probably faster for non-structural investments. The only variable that can provide remedy is private consumption, which again is currently very weak. Should consumers get more optimistic toward the end of the year, we could see the benefits of the exports-driven acceleration in investments together with the benefits of rising private spending.

That, however, will take a solid change in America’s economic outlook, something that is very unlikely to happen under the current presidential administration.