Consumer spending has markedly slowed due to higher interest rates and depleted savings, but it is positive enough to maintain GDP growth. This was confirmed by Tuesday morning’s retail sales report.
“June retail trade sales were up 0.2 percent (±0.5 percent)* from May 2023, and up 0.5 percent (±0.5 percent) above last year. Nonstore retailers were up 9.4 percent (±1.6 percent) from last year, while food services and drinking places were up 8.4 percent (±2.3 percent) from June 2022,” said the US Census Bureau.
“It’s Consumer Spending, Stupid!” is the title of a NYTimes article by Professor James Livingston, an economic historian, written years ago that helps to explain why the pandemic recovery has continued and no recession is on the horizon.
“As an economic historian who has been studying American capitalism for 35 years, I’m going to let you in on the best-kept secret of the last century: private investment — that is, using business profits to increase productivity and output — doesn’t actually drive economic growth. Consumer debt and government spending do. Private investment isn’t even necessary to promote growth.”
Professor Livingston’s column highlighted why without government investing in future growth, US economic growth would have stagnated since 1980.
“Between 1900 and 2000, real gross domestic product per capita (the output of goods and services per person) grew more than 600 percent. Meanwhile, net business investment declined 70 percent as a share of G.D.P. What’s more, in 1900 almost all investment came from the private sector — from companies, not from government — whereas in 2000, most investment was either from government spending (out of tax revenues) or “residential investment,” which means consumer spending on housing, rather than business expenditure on plants, equipment and labor.”
We have been a consumer-driven economy for decades, but because of the $trillions being invested in the US economy today, we may escape a recession altogether—a ‘no landing’ scenario in which economic growth continues unabated this decade.
Goldman’s chief economist, Jan Hatzius, trimmed the probability of a recession in the next 12 months to 20 percent from 25 percent — well below the 54 percent median among forecasters who participated in the last Wall Street Journey survey.
“The main reason for our cut is that the recent data have reinforced our confidence that bringing inflation down to an acceptable level will not require a recession,” said Hatzius.
Add to that the Atlanta Fed GDPNow estimate of second quarter growth is now 2.4 percent.
This was after recent increases in the nowcasts of second-quarter real personal consumption expenditures and real government spending growth from 1.2 percent and 2.4 percent, respectively, to 1.4 percent and 2.8 percent, partially offset by a decrease in the nowcast of second-quarter real gross private domestic investment growth from 10.5 percent to 9.4 percent.
Professor is brutal in his assessment of the contribution of corporate profits to US economic growth.
“So corporate profits do not drive economic growth — they’re just restless sums of surplus capital, ready to flood speculative markets at home and abroad. In the 1920s, they inflated the stock market bubble, and then caused the Great Crash. Since the Reagan revolution, these superfluous profits have fed corporate mergers and takeovers, driven the dot-com craze, financed the “shadow banking” system of hedge funds and securitized investment vehicles, fueled monetary meltdowns in every hemisphere and inflated the housing bubble.”
Consumer spending is not only the key to economic recovery in the short term; says Livingston, it’s also necessary for balanced growth in the long term. If our goal is to repair our damaged economy, we should bank on consumer culture — and that entails a redistribution of income away from profits toward wages, enabled by tax policy and enforced by government spending. (The increased trade deficit that might result should not deter us, since a large portion of manufactured imports come from American-owned multinational corporations that operate overseas.)
So it turns out the American consumer is the mainstay of US growth, and we should celebrate that fact.
Harlan Green © 2023
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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