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Business@Large – Consumer Spending Up – Good News or Bad News? Yes!

Recent economic data suggests we consumers are starting to re-open our wallets.  That could be good news.  Or as Fiddler Tevye said, on the other hand…

Goodbye Mr. Thrift – we hardly had a chance to know ya’.  We’ve heard much these last 12 months about the “new normal” of consumer spending.  You know the story line.  Times are tough, jobs are scarce, people are nervous.   And when people are nervous or uncertain about their financial future they tend to change their buying habits.  Discretionary spending gets redefined.   We find we can get by with fewer pairs of shoes, fewer meals eaten out, and less, well, stuff.  Staycationing was all the rage in the summer of ’09 although surprisingly no one has made a 3-D comedy about that yet.  Personal savings rates increased and many people began to pay down their debts instead of adding to them.  Cheap became chic.  Consumers tried harder to act responsibly and live within their means.  After all, that’s what adults are supposed to do, right?  The orgy of accumulation was cancelled – or at least postponed – due to a lack of participants.

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But as the economic train wreck has been cleaned up a bit and progress has been made on repairing the track bed, people are starting to reopen their wallets.  Earlier this week the Commerce Department announced that we Americans increased our personal spending for the fifth month in a row.  Granted, spending rose only 0.3% and the comparative baseline months of 2009 spending were among the worst in a decade, but there indeed was cheering heard on Wall Street and in Washington.  And some personal evidence – My wife and I took a cruise last week and there weren’t many empty deck chairs on board.

The Conference Board also reported this week that consumer confidence was up in March, higher than economists’ expectations.  Could these be indicators that we have finally turned the corner on this mother-of-all recessions?  Should we strike up the band for a chorus of “Happy days are here again?”

Before we pop too many champagne corks perhaps we should look a little closer about what the uptick might mean because the increase in consumer spending has both a bright side and a dark side.  It’s the classic good news/bad news story.  The good news is that spending is up.  And the bad news is that spending is up. 

The good news part of the story is easy to appreciate.  Increased spending is often the result of a combination of increased confidence in the economy or in people’s individual job situations.  Spending creates demand which leads to more output of goods and services and that creates jobs which in turn leads to headlines and positive buzz about job growth which further leads to improved consumer confidence which leads to further spending which adds to the cycle and a stronger economic engine and so on.

That sounds like high-five time, with increased spending being the ticket out of the bad times.  After all, that’s why the government gets involved in Keynesian pump priming, to spur job growth.  But, as was said, there is also an element of bad news involved in all this.  Or as the old Monty Python line states, there is a bit of rat in the strawberry tart.            

While the economic numbers indicate we are spending more money, they also indicate that overall we are not making more money.   That means we might be starting to once again spend money we don’t have and that is the behavior which helped get us into the meltdown mess in the first place.  Credit is still cheap and passbook savings rates are a pittance, so we are starting to lose our incentives for belt tightening.  After being on the diet for awhile, some folks are starting to visit the all-you-can-eat buffet again.   It’s usually easier and more fun to say “Yes” rather than “No” to that new gotta-have-it.  It’s the possible return of impulse, of bad choices, of the heart trumping the head. 

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But it’s still not clear whether the numbers suggest a random uptick or more of a trend.  The luxury goods market is still depressed and one would think that spending by the well-heeled – many who have done quite well these last 12 months – would be a leading indicator of the recovery.   And some of the increased spending involves durable goods since cars and washing machines wear out at some point and do need to be replaced.

So looking ahead for the economy, the best we can hope for is a Goldilocks spending pattern.  With too much consumer spending we put ourselves deeper in debt, temporarily overheat the economy and replay this mess 5 years down the road.  With too little consumer spending, businesses close, tax bases erode and jobs are lost.  There needs to be a balance, just like the middle bed in the Goldilocks tale.  So get out there and spend, it’s good for America.  But let prudence be your principle.  It’s the Hillstreet Blues wisdom: “Be careful out there.”    

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