May 14 2012

Consumer Spending Slows: Good News or Bad News?

Hadley Heath

From all of us at IWF, we hope you enjoyed Mother's Day.  

Think about your gifts... Did your family spend $152 on you?  That was the national average this year, up from $140 last year (an 8 percent increase).  

Good news for the economy?  

It seems like spending on a few events - like upcoming family vacations or prom - show marked increases from last year.  Are these an indication that our economy is recovering?  To really know the answer, we have to dig into some data on consumer spending trends, inflation  and even wages.  The data actually reveal some more serious economic problems that underlie the occasional spike in expenses.

At the end of 2011, I pointed out several times that the consumer price index (a measure of inflation) had increased by 3 percent.  That measure didn't include a near 10 percent increase in gas prices, too.  At the same time, in 2011, wages increased by an anemic 1.9 percent.  You might notice that this increase in wages isn't enough to track with inflation.  So how did many people survive 2011?  With magic pieces of plastic... called credit cards.

In January and February of 2012, the change in real disposible income (DPI, that is, income after taxes and inflation) was negative.  But consumer spending continued to increase, none the less.

Finally, in March, real DPI increased by 0.2 percent.  But consumer spending fell off.  That's because now, credit, for many people, is tapped out.  They aren't in a position to get more credit, and this actually has a negative effect on saving accounts rates.

Some people may find it encouraging that Americans bought more expensive Mothers' Day gifts this year.  But statistics on consumer spending only tell a small part of the story. 

The same could be say of the national unemployment rate.  While it's been falling the past few months, much of the decrease is not driven by new jobs, but by long-term unemployed people giving up their search for work.

It's important to keep in mind that national economic indicators are narrow in scope.  Our economy could show surface-level signs of recovery in 2012, but serious changes are needed if we want to address our economic woes at the root.

First among needed changes is the injection of more personal responsibility in household budgets.  While slower spending sounds like bad economic news, it could be good if it means Americans are making the smart decision to live within their means, rather than adding to personal debt.

So next Mother's Day, if you splurge on a nice gift for mom, remember to compensate from another part of your budget.  It's a nice gift to moms when they can see their children financially smart, secure and independent.

 

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