Here’s what the Consumer Metrics Institute had to say about the Bureau of Economic Analysis’s report on 4th quarter 2011 GDP yesterday:
If the changes [i.e. in inventories] are real, it is likely that manufacturers were rebuilding inventories after being overly cautious during the third quarter, following their classic pattern of a lagging over-correction. In that scenario we should expect this line item to revert to long term trend lines during the first half of 2012, lowering the headline numbers at that time. However, if the numbers are the phantom result of changes in commodity pricing (particularly oil) impacting inventory valuations even as physical levels remain largely unchanged, then the headline number is largely meaningless and we can expect the quality of the GDP numbers to continue to be held hostage by the BEA’s price deflaters.
and
Consumer spending on goods surged, but was largely offset as consumer spending on services sagged. The aggregate improvement of 0.21% in consumer spending was accomplished even as “real” per capita disposable income was flat, indicating that some of that improvement (particularly since it was focused on goods) may simply be retail sales brought forward as a consequence of deep holiday discounting on the part of retailers.
They conclude by noting that the BEA’s data are so awful that any policy based on them is bound to suck as well.
I honestly don’t see how increases in consuming spending in the absence of increases in consumer income are consistent with increased consumer de-leveraging.
Defaults, which continue to proceed at a significant pace, are also a form of deleveraging. If consumers are spending some quantity of that newly liberated income stream then the spending increase is sustainable. There may also be a psychological aspect, assuming people are thinking the economy has hit bottom and will at least continue muddling through.
I think you’re confusing statistics with the actual consequences. Sure, defaults reduce the amount of total indebtedness. They also reduce creditworthiness for years to come. There’s no a priori way to quantify the effect on consumption—it depends on individual circumstances.
By the same reckoning death reduces the disease statistics and burning down the house is a form of redecorating. I don’t think default should ever be looked on as a positive.
Let me expand on that last comment a bit. Reducing debt as a result of default is not only worse than reducing debt by paying the debt off it’s a lot worse.
It doesn’t only affect the individuals who default but everybody seeking credit. It affects the individuals who default by lowering their credit scores for years. It affects others since lenders will begin raising the credit scores they require for borrowing and increasing their charges for borrowing whether by charging higher interest rates, fees, adding new fees, requiring mortgage insurance, etc. It will also raise the cost of mortgage insurance.
Combined that will have the effect of reducing consumption below what it otherwise would have been. Not a good thing.
I have no objection to anything you’ve written. I’m simply stating that default is an inevitable part of the deleveraging process after an unsustainable, massive credit boom. It can have the effect of reducing available credit, but one can argue that’s a good thing after the banking sector extended vastly more than it should have. In fact I do argue credit requirements should be significantly higher than we’ve become accustomed to in the last fifteen years.