Headwinds are blowing that threaten to stall this economic recovery, say the pundits. Really? Those ‘headwinds’ are caused by rising inflation from higher gas and food prices, certainly, but that is really a symptom of how cash-strapped are consumers even 2 years after the end of the Great Recession.
The latest signs of consumer health show that consumers are buying, but not enough to kick growth higher because they still have so much debt to pay down. And they won’t be able to make much of a dent in debt, unless their incomes rise faster.
The best income measure is the Personal Income and Expenditures report of the Commerce Dept. Personal income in April did post a 0.4 percent gain equaling the pace in March. Importantly, the key wages & salaries component increased 0.4 percent, following a boost of 0.3 percent in March. (Wages and salaries make up some 80 percent of personal income; self-employed incomes and transfer payments the rest.) However, real disposable income (after taxes and inflation) in April was flat, matching the March pace but actually topping February’s 0.1 percent decline. Consumers have had no recent improvement in real spending power, in other words.
The situation is not being helped by the push in several states to eliminate collective bargaining of public employees. Collective bargaining means union bargaining and it is the only countervailing force to Big Business lobbying for more tax breaks—which is the corporations’ method of collective bargaining—when corporations have record profits. Corporations have always been able to bargain with their dollars, that is to say, whereas most employees can’t bargain for their wages & salaries unless they belong to unions.
The fact that there is mild inflation is actually a good thing. It means demand is increasing and not stagnant, even with personal incomes barely keeping up with the inflation. In fact with gas prices taken out, the Consumer Price Index is up just 1.5 percent in a year.
Consumers have been spending, as we said, but not with their credit cards. Outstanding credit gains are narrowly confined to non-revolving credit which rose $7.2 billion in the month for an eighth straight gain. The dominant factor in this category is vehicle sales which were strong through April but fell significantly in May. However, the decline in motor vehicle sales is largely attributed to shortages of vehicles dependent on parts from Japan. The shortages are expected to alleviate soon with sales reviving.
But revolving credit, dominated by credit cards, fell $0.9 billion in April. March's data show revolving credit as unchanged which, unfortunately, is the second best reading since the financial collapse in 2008. Consumers are still focusing on paying down credit card debt while banks are still writing off bad debt though not as rapidly as they did during the recent recession.
Consequently there is little pressure on employers to raise wages with so many still out of work. Since the start of the U.S. recession in December 2007, though, household debt leverage has declined. It stood at about 130 percent of disposable income in 2009. How much further will the deleveraging process go? In addition to factors governing the supply and demand for debt, the answer will depend on the future growth trajectory of the U.S. economy. And future growth is itself dependent on policies that increase personal incomes and wages & salaries.
Harlan Green © 2011