Consumers Are Spending Again!

Popular Economics Weekly

A little noted Federal Reserve report on consumer debt just pulled a big surprise. Consumers are borrowing on their credit cards again. Though personal consumption contracted in June, you'd never know it from consumer credit data, which show a $15.5 billion surge for the largest gain in more than four years. This is in part because auto sales are surging again, as well as back to school sales.

The gain is led by a $10.3 billion surge for non-revolving credit, less of a surprise given June's strength in motor vehicle sales, says Econoday. But the best news may be revolving credit which rose $5.2 billion for a second straight solid gain.

Are consumers really beginning to spend again? If so, look for higher GDP growth ahead, in spite of the S&P downgrade of federal government debt to AA+ from AAA, the first time that has happened to the U.S. It is too early to know if the downgrade of Treasury securities will have an effect on interest rates, or even be on the radar of ordinary consumers.

This is important because the personal consumption expenditures (i.e., consumer spending) has not yet recovered from the recession. Last Friday, the BEA released revisions for GDP that showed the recession was significantly worse than originally estimated, mostly because consumers had cut back. And Personal Income less Transfer Payments is one of four indicators the National Bureau of Economic Research (NBER) uses in business cycle dating to determine recessions, as we have said.

Here is Calculated Risk’s graph on the historical fluctuations in personal income that happens during recessions (blue streaks). Prior to the revisions, the BEA reported this measure was off close to 7 percent from the previous peak at the trough of the recession. With the revisions, this measure was off almost 11 percent at the trough - a significant downward revision and shows the recession was much worse than originally thought.

But the graph also shows that it is now less than 5.1 percent below its prior peak. Combined with a rise to 5.4 percent in the personal savings rate in July, this is another sign that consumers are regaining their financial health.

And motor vehicle sales soared in July. Unit sales show a big monthly gain, up nearly six percent vs June to a 12.2 million annual rate. The gain points to relief for the motor vehicle component of the retail sales report which has posted four straight declines in the aftermath of the March earthquake and tsunami that disrupted the Japanese supply chain.

And finally, jobs are returning to the private sector as the Bureau of Labor Statistics (BLS) reported 117,000 non-farm payroll jobs created, with the unemployment rate dropping back to 9.1 percent, and a good jump in average hourly wages, also a big improvement from last month’s jobs report.

The U.S. economy added an even larger 154,000 in the private sector, though partly because 193,000 people dropped out of the labor force, according to the latest government data. Job gains in May and June were also revised up by a combined 56,000, the Labor Department reported last Friday. Even better news was that average hourly wages rose 10 cents to $23.13, though the workweek was unchanged at 34.3 hours.

We can hope that with the debt ceiling crisis now on the back burner until 2012, the focus will return to job creation. There are lots of ways to create jobs in the private sector, which includes the return of some 70,000 private industry construction workers after temporary resolution of the FAA funding cutoff. Does it matter who pays them in times like these?

Harlan Green © 2011