Wednesday, May 13, 2009

Consumers Throw in the Towel

Amid talk of green shoots and second half recoveries, the average American, Canadian and European is being squeezed without respite.

Last week, we got the monthly report on consumer credit. This week, we learned of the previous month's retail sales. Both reports were abysmal. This is, of course, intuitively logical. The savings rate is rising, wages are falling, unemployment is still climbing, tax receipts are plummeting and the social aversion toward conspicuous consumption often mentioned in these pages continues to grow.

Here are some updated charts showing all of the above in pictures. Considering that consumption accounts for approximately 70% of the US economy, I have a hard time believing a month over month increase in housing starts (residential investment is 3% of economy) can be a legitimate "signal" for much of anything. But I supposed some are more inclined to drinking kool-aid than others...

The first chart is of this morning's retail sales numbers. (via Calculated Risk)

Note that household expenditures were one of Bernanke's "green shoots" that he has been talking about for the last few months. So much for that idea. The little blip on the chart will likely fade into the distance as retail sales continue to weaken throughout the year.

Next are two charts of Consumer Credit. The first is revolving and non-revolving separated. They are both below the zero line for the first time since numbers were collected. (courtesy of Econompic Data) The second shows consumer credit back to the early 40's (from Zero Hedge). We are in unchartered territory.

It is painfully obvious that the growing unemployment is taking its toll on personal consumption expenditures. Unfortunately, unemployment is still rising at a frightening pace. Analysts and pundits have been trying to use the fact that because the April nonfarm payrolls (-538,000 jobs) wasn't as bad as the previous month's (revised to -699,000 jobs), we should look to that as signs of a pending recovery. Hardly. To start, the BLS continues to add jobs (226,000 this month) via their mysterious birth/death model. The model assumes that because one business has closed, another one must open in order to satisfy demand. It doesn't matter if there is no longer demand for a certain good or service. That is impossible according to the model. The model is the ultimate microcosm of the neoclassical "General Theory of Equilibrium," which is bunk.

Additionally, April saw the addition of 60,000 government workers to carry out the census - which itself doesn't add anything to the economy. Regardless of what you heard, the employment picture is not getting any better. The chart below shows the contraction as a percentage of the workforce in comparison with other recent recessions. There is no end in sight. (hat tip Denninger for the chart)

As one would expect when jobs are being lost at the most rapid pace in 80 years, wages are falling as desperate workers accept lower pay or fewer days of work in order to save their jobs. (chart via Econompic Data)

You don't have to be a bean-counter extraordinaire in order to figure out that with the above combination, government tax receipts are going to fall off a cliff. Perhaps it would have been wise then for government budget officials to take this into consideration when making their budget projections for at least the near-term. But I suppose that gives too much credit to the ability of bureaucrats to see any potential outcome other than their own wishful thinking.

California, which by itself makes up 13% of the US economy, revealed in it's latest budget update that its sales tax receipts are down 50.8% year over year. Income tax receipts were down by 43.6%. This for a state that is already in dire straits with its budget. Following the release of the report, governor Schwarzenegger suggested he would be required to close schools, release prisoners and limit basic services in order to keep the state running. Swell. Somehow I don't think we've heard the end of this story.

One positive signal that I have referred to previously is the rising savings rate. It is rising now at the steepest rate since WWII. Neoclassical economists will disagree that this is a good sign because they believe in the twisted logic of a "paradox of thrift." They see a rising savings rate as the ultimate evil, and will go to absurd lengths to discourage this behavior. Those who practice common sense economics, on the other hand, see a rising savings rate as a positive sign because it signals the necessary accumulation of capital that is required prior to any legitimate investment in productive capacity.

It comes as no surprise to anyone looking at the above data that the consumer is retrenching. In order to conclude otherwise, one would have to selectively be looking for disconfirming data and subsequently using the stock market's meteoric rise as further confirmation. Textbook cognitive dissonance and circular-logic thinking.

From an anecdotal perspective, there is evidence abound that people are changing their consumption preferences and delaying purchases until big-ticket prices move more inline with their perceived future incomes. My weekly google search for "frugality" yielded this following article among many others:

Tulsa Couple Is Happy Being Frugal

TULSA, OK -- What a turn-around it's been. From lusting after the latest gadgets to wondering whether we'll have jobs tomorrow. The recession has changed a lot of assumptions, including the one that says we should live our lives in debt and never go without. A young Tulsa couple embraced a different outlook on life when they were living on one income with a baby on-the-way.

The baby's now here and they say their old way of spending money, money they didn't have, is gone forever.

A recession's no walk in the park for any of us. But, for Natasha and Aaron Ball, a walk in the park is part of their strategy for beating an economic bust. They've embraced bad times as a chance to get ahead. And, turned their backs on a way of life that collectively sent us off-the-tracks.

"I think the first fight we had about it was I told her we're only gonna eat out once a month and she refused. ‘No, no, no, I have to eat out once a week or twice a week,' whatever," said Aaron Ball.

"When I married my husband he was very in to frugal living and wanted me to come on-board with that and that was difficult at first, yes, very hard," said Natasha Ball.

But, not anymore. Natasha's fully on-board. In fact, she's the engineer driving the family frugality train now.


- Contracting Retail Sales
- Contracting Consumer Credit
- Falling Wages
- Rising Unemployment
- Plummeting Tax Receipts
- Rising Savings Rate
- Social Embracement of a new "Culture of Frugality"

As I said from the outset of this crisis. Bernanke and his banking buddies can make as much credit available as they want. But if there is not the desire nor the ability for consumers to borrow it, it will have no effect. He is pushing on a string. How exactly does any of this lead to inflation?

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Fredrik said...

None of what you describe in your piece leads to inflation. It leads to deflation. The argument for inflation is with regards to the printing of money i.e monetary inflation. If the stock of money is substantially increased but the economy retains roughly the same amount of goods and services than clearly each price tag will have to be more expensive as the new stock of money is divided up. Question is which force is more powerful, the consumer retrenchment situation you describe or the effects of quantitative easing. Most in the market seem to focus only on the deflationary effects of a reduction in aggregate demand, whilst paying little regard to the effects of monetary inflation.

Namke von Federlein said...

Hi Matt;

Great posts! I've been traveling a bit lately. After Obama's last TV hour I just threw in the towel.

About inflation : There is one thing that can lead very quickly to inflation - panic.

Since there is not one single useful thing being done for citizens - eventually they will panic. California (in your blog post) is a great example. Detroit is a better one.

I will even refine my estimate of the US civil war starting on August 14th, 2009 in Detroit. Today, I will even suggest a time (just for fun). Due to the weather patterns - about 3:48 in the afternoon would be about right. At this point, I only imagine one thing that can stop it, but it doesn't seem to be in motion. Oh well.

When life is too much, roll with it, baby (Steve Winwood).

Occdude said...


I understand you are a follower of Autstrian economics and if this is the case why don't you accept the Austrian definition of inflation which is an addition to the credit/monetary base?

Inflation tells you alot about an economy. For instance why do governments inflate? Its because they don't produce enough to supply their needs, so their facile answer is to steal it stealthily with inflation.

Now how this applies to our situation and why we have inflation currently is because WE don't produce enough AND we don't save enough, which means someone else is doing the saving and producing, that someone else is all the creditor nations out there. When (note: I didn't say if) they stop producing for us and lending us their savings, all that money and credit we made will be chasing a shrinking pool of goods no longer being imported. This will be your inflation. Because there is no manufactoring capacity and no lending, price inflation will manifest itself irrespective of the general economy. It doesn't matter if there is general asset and credit deflation, that is a temporary phenomenah, the real move, the death blow will be inflation and the dollar will be it's victim.

So don't get "juked" by this deflationary period. Deflation and liquidation are a natural market based force which although is not a pretty thing to see, is MUCH more benign than inflation. You can't make any rational decisions in an inflationary environment. The good is penalized and the bad is propped up, its TERRIBLE for an economy, whereas deflation is a healing and in this case unavoidable factor in the long run AFTER the dollar crashes.

So don't confuse the symptom with the disease. Trade your cash positions, just don't get too bound by them. Your gonna see the symptoms of inflation which will have multiple manifestations, but essentially the purchasing power of the currency is gonna get wiped out and anybody holding that currency is gonna get wiped out.

Olives said...

ITA. The inflation equation involves velocity, which is shrinking as clearly outlined in your "summary".

Occdude said...

If you think of inflation as "dilution of a currencies purchasing power" you don't get confused with all the noise of money velocity and consumer price inflation, which may be mutually dependent BUT are besides the point. As if asset price deflation isn't bad enough, try having a co-existing dilution of purchasing power. Deflation plus inflation does not equal deflation.

Matt Stiles said...


We're not going to agree on this. I spent a week back in March with a number of posts and follow-ups explaining why an inflationary outcome cannot possibly result from our current situation. At issue is not the rise in base money supply. Base money makes up 3-8% of the total supply of money and credit (depending on how you count it). It has been doubled, yes. But it is just sitting on deposit with the Fed. It is not circulating. In order for this to become inflationary, the money multiplier must continue to stay positive (banks need to lend it out in a fractional manner). The money multiplier is crashing.

The Fed's models (and sadly the same models that many Austrians criticize and subsequently use as an argument) suggest that if they create deposits on the balance sheets of banks, it will be lent out by a factor of 12x. This is not how banking works, as shown by Steve Keen in "the roving cavaliers of credit." Banks first make loans and then acquire deposits to meet capital ratio requirements. There is no desire or ability for banks to borrow. And as I showed in this article, there is no desire or ability for households to borrow.

And all the while, the self-reinforcing cycle of falling prices ingrains itself into the minds of prospective consumers. Deflation will win this battle. After either enough time elapses or asset prices fall enough (much more), the devil of inflation may have a chance.

Anonymous said...

What do you think would happen to the price of gold?

Steve Saville argued that in a world where the monetary role of gold has been almost extinguished, it is unlikely that gold would be a good asset to hold vis-a-vis cash/securities in a deflationary situation. But in a debt collapse, with soaring default rates... so there could still be reasons to be optimistic about gold's prospects.

Yvette said...

The Great Depression, many similarities here if you understand what happened back then... minus the left/right spin machines. I will add 1 more similarity to your summary list...


- Contracting Retail Sales
- Contracting Consumer Credit
- Falling Wages
- Rising Unemployment
- Plummeting Tax Receipts
- Rising Savings Rate
- Social Embracement of a new "Culture of Frugality"
- massive risky speculation and the greed it brings out in people, especially those in power(regardless of political party)

Eerily similar to the GD1

occdude said...

" After either enough time elapses or asset prices fall enough (much more), the devil of inflation may have a chance."

Couldn't agree with you more (or you couldn't agree with me more).

The government true to its inefficient nature is just now starting to get the hang of this inflationary thing. Deflation is here and now, but inflation is there and later.

Ben Bernanke a student of the great depression with near perfect SAT scores and a genius IQ shouldn't be underestimated in his ability to get money flowing into the economy. What his game plan is and where he errrs is that he thinks once inflation kicks up he can then take the punch bowl away.
Politically thats unfeasable and he will be fired if he trys to kill a likely feeble economic recovery that has inflation outpacing growth.

But then again look at it his way. If the powers that be don't allow him to drain liquidity, he has political cover he can say (like Greenspan) that it isn't his fault. So its a win-win for Ben.

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