The Decline in Real Personal Consumption Expenditures

Via Cullen Roche there’s an article from the San Francisco Federal Reserve that’s worth taking a gander at. The graph above is just one of the very interesting illustrations of what’s happened to the U. S. economy over the last several years Here’s the observation associated with that graph:

Economic theory assumes that consumption is a key determinant of personal well-being. Many households became accustomed to the consumption trend established before the recession and expected it to continue. From that perspective, the amount of foregone consumption might be viewed as a measure of the recession’s cost for the average person. However, the pre-recession consumption trend was almost surely not sustainable because much of the household debt that helped finance that spending was collateralized by bubble-inflated housing values. Consumption was bound to slow sooner or later. Indeed, the average annual compound growth rate of real consumption per person since the recession ended in June 2009 is 1.15%, well below the 2% rate before the recession.

Moreover, it is unclear whether continuing the pre-recession consumption trend was economically desirable. Many households might have continued saving too little for retirement while becoming more burdened with debt. When the housing bubble was expanding, former Fed Chairman Paul Volcker (2005) noted several “disturbing trends,” including that “personal savings in the United States have practically disappeared,” and that “home ownership has become a vehicle for borrowing.” He called for federal policies to “forcibly increase” the saving rate as a way to address the growing imbalance between domestic spending and production.

Particularly notable is the discrepancy between nominal personal consumption expenditures and real personal consumption expenditures. People tend not to be paid in real dollars but in nominal ones and that has been very much the case during and since the Great Recession. Just look at the household income statistics.

Wasn’t the result we’re seeing one of the foreseeable consequences of quantitative easing? Assets, including many of the things you buy on a daily basis like food, have gone up in price?

29 comments… add one

  • john personna

    Wasn’t the result we’re seeing one of the foreseeable consequences of quantitative easing? Assets, including many of the things you buy on a daily basis like food, have gone up in price?

    Huh? The curve was twisted away from growth by a real estate and credit recession. That’s what produced the dreadful downward twist at 2008. The 2009 reversal was good news, but there are many candidate-reasons for why it did not return quite to pre-2008 growth.

    The principle one in my book was that it was a real estate and credit bubble and recession!

    Do you seriously think consumption should snap back to the same growth witnessed in the last years of a bubble? Even as people still carry massive debt racked up in that same bubble?

  • steve

    This is one of the reasons I have been expecting a long and slow recovery. People need to rebuild savings, we have a real estate glut, including commercial, and the very large majority of people are not seeing wage growth.

    Steve

  • Quantitative easing is the monetary version of trickle-down economics. It inflates stock prices, benefiting people who own them. The wealth effect causes them to spend more. Unemployment would be even worse if there had been no QE2. Eventually, I think we’ll see a QE3.

    Marc

  • Do you seriously think consumption should snap back to the same growth witnessed in the last years of a bubble? Even as people still carry massive debt racked up in that same bubble?

    Quite the contrary, I’ve been saying all along that consumption was unlikely to snap back. I think our problems are largely structural and that discussions of an “output gap” are phantasms.

  • Quantitative easing is the monetary version of trickle-down economics. It inflates stock prices, benefiting people who own them.

    I think that’s a secondary effect—it goes along with the boosting of asset prices I mentioned in the post. I think the primary objective was to boost bank balance sheets which will be darned hard until they start letting go of some of the weakest assets on them which, in turn, will reveal just how insolvent they really are.

  • john personna

    phantasms is a good old word ;-)

  • Drew

    Mr. Schulman makes an important point that has been widely observed but I’m not sure generally appreciated – that QE has driven money to risky assets and commodities. I suppose its just yield chase. And so if you live or work in the financial industry in NY you’d hardly know there was a recession.

    And yes, one view is that the end of QE could cause a collapse in risky assets, forcing the Fed (for political reasons perhaps) to crank up QE3.

    But when does that cycle end? And my the damage done to the Average Joe paying more for food, clothing etc.

  • john personna

    Mr. Schulman makes an important point that has been widely observed but I’m not sure generally appreciated

    I think it is very widely appreciated in even general-reader finance circles. The only question is “how much?”

    Something like the oil price has many, many, components.

  • john personna

    (general-reader finance circles are also concerned with how much the SP500 reflects QE.)

  • Drew

    “Particularly notable is the discrepancy between nominal personal consumption expenditures and real personal consumption expenditures. People tend not to be paid in real dollars but in nominal ones and that has been very much the case during and since the Great Recession. Just look at the household income statistics.

    Wasn’t the result we’re seeing one of the foreseeable consequences of quantitative easing? Assets, including many of the things you buy on a daily basis like food, have gone up in price?”

    I’ve been distracted with phone calls and such (I hate it when real work gets in the way!) so I haven’t had time to work through this little teaser: with an accomodation for population growth and perhaps a small amount of wage gain, the proposition that people are paid in nominal dollars seems correct. Simpler: wages haven’t kept up with everyday consumer costs. So with inflated consumer prices being what they have been, we see that nominal expenditures are at the pre-recession trend line. How does that work? People are getting less real utility from their expenditures?? (lower unit volume sales) QE has sufficiently lowered time financing costs to make up for lost purchasing power? Dipping into savings?

    The first and third cases seem to not bode well for the Average Joe. And is the second even true, or sustainable?? So why a QE3??

  • Why are they using an index when they could just use the real, nominal and real per capita figures? It makes me suspicious since you want to ensure, at the very least, that the index treats declines just as it treats increases (one of the issues with the CPI before it was addressed).

    Real PCE is above its pre-recession levels. Have we had that much population growth that it is now below it pre-recession high at a per-capita level? I’d be very, very curious to see what sort of index he is using.

  • Basically I’m calling bullshit on the graph till we know more. All the comments based on the graphs are of a dubious nature since they are starting with a potentially false premise.

  • The problem I have with arguing that improving the health of bank balance sheets was the primary objective is that the effect of QE is to flatten the yield curve by causing the rates on longer-term government securities to come down. Banks make more money on loans when the yield curve is steep, as they borrow short and lend long.

    A healthier economy helps the banks by boosting loan demand. Overall, they make more loans, but the profit margin on each loan is less.

  • That’s where the other leg of Fed policy comes in, Marc. Banks are borrowing at, essentially, zero. Any lending is making decent money.

    I’m not arguing that what the Fed is doing is an effective way of helping the economy. I’m arguing that it’s helping banks and folks in the financial sector able to take advantage of the situation the Fed has created.

  • Drew

    “Banks make more money on loans when the yield curve is steep, as they borrow short and lend long.”

    Absolutely correct. Bank’s raw material costs are the cost of money. But correct me if I’m wrong, but isn’t the Fed now paying interest on reserves? So a bank currently has a built in arbitrage to just sit on the money and not make “risky” loans.

    So the economy stinks. Businessmen have retreated into their turtle shells for a variety of reasons. Bank’s loan portfolios, as Dave points out, are probably not as healthy as advertised. So I ask again, how would a QE3 benefit the general economy?? I understand the benefit to Wall Street. But I also understand the harm to the purchasing power of the general populace. Why does this make sense?

  • I downloaded the BEA monthly PCE data and I’m very suspicious of the index that was used. My graph is nothing like the one above.

  • Drew

    Steve V –

    That’s the latent engineer in you. Never, ever take data at face value. As you point out, it makes all the rest just babbling.

  • Drew & Dave,
    I go back to my trickle down argument. I’m fortunate enough to own some stocks and bonds. I believe (but can’t prove!) that I’m somewhat wealthier than I would have been without QE. Because I am and feel wealthier, I go to restaurants and travel more often. This is good for people who are lower down on the economic totem pole.

    That’s how QE helps the average Joe.

  • Drew

    But Marc –

    I’m all for investing in America and reaping the attendant rewards for that effort and risk. I would. I’m in the PE business.

    But policies have costs, flip sides. If QE is inflationary, and if a significant proportion of the population is harmed by that, and if a favored minority – Wall Street – is benefiiting from this government policy then I’m at a loss to explain that policy’s virtue.

  • Drew — At the time that QE2 was telegraphed (last August, at the Jackson Hole conference sponsored by the Kansas City Fed), there was widespread concern about a possible double-dip. The intent of Bernanke’s speech was to provide reassurance that the Fed had the ammunition to prevent the dip and the intention to fire it. He was playing a mind game. It worked: psychology improved, the markets improved, the economy proved.

    If some additional inflation was the cost of QE2 (although some analysts dispute this, attributing most of the run-up in headline inflation to China’s and India’s growing appetites for fuel and food), it was more than offset, IMO, by the lowered risk of a double dip.

    Now, as I’ve been talking about in my blog, I believe that the combination of fiscal tightening in the U.S. (regardless of the details) and higher interest rates in the eurozone make the risk of a double dip here (and in Europe) all too real.

    Somewhere down the road, I’ll bet there will be a QE3.

  • Icepick

    It worked: psychology improved, the markets improved, the economy proved.

    It’s funny to hear people speak of an improved economy. I keep seeing more and more closed businesses, I know of more and more people losing their jobs, and the few people getting jobs are getting minimum wage part-time shit jobs. Where is the improved economy? North Dakota?

  • Where is the improved economy?

    At least around here and based on the mall parking lot-o-meter there’s not much of a recovery. Everybody from my clients to my dentist to the local Chinese take-away says that business is slow.

    That being said I strongly suspect that some places are significantly worse off than others. So, for example, I think that California, Nevada, Florida, and Michigan are in much worse shape than Washington, DC and its Virginia and Maryland environs. And I’m given to understand that there are New Jersey, Connecticut, and even a few New York neighborhoods that are booming.

  • Icepick

    Most of the doctors my mother is seeing right now are doing noticably less business now than they were 12 months, or even six months, ago. The dentists have been struggling mightily for three years now. We noticed the one across from Mom’s oncologist has actually filed for bankruptcy, for one example.

    The malls here aren’t just not doing better, they’re doing worse. And that’s amazing because of all the store closings. If there are fewer stores, one would expect traffic to pick up at those that are left. I’m just not seeing it.

    RMA.

  • steve

    That’s Florida. We just landed a thousand new jobs in our area. The restaurants are full again. We are not booming, still some houses to sell, but things have definitely picked up.

    Steve

  • john personna

    This data is actually more optimistic than the Consumer Metrics stuff, which still shows contraction.

  • I second Steve’s comment. I live in Southwest Florida (in Bonita Springs), between Ft Myers & Naples. The economy has definitely improved here; there are even indications that housing prices have begun to increase.

  • Drew

    Marc –

    Thank you for the thoughtful response. I suppose there is no definitive answer, but I’m still troubled by your position/assertion. Our offices are in NY metro, and that region of the country is booming because of – my words – the subsidy of QE. To slough off inflation on that rest of the country as just the price of avoiding a double didp seems cavalier. And, of course, we may be approaching a double dip anyway……….unless, and I agree we will, get QE3. And now we are in a do loop: In which case Wall Street wins and Main Street loses.

    BTW – I’m in Naples frequently, and its not clear to me they ever really had a recession. You wouldn’t know it from the 3rd and 5th street eateries. Only in the boring residential econoboxes north of Pine Ridge or maybe Immokolee road and east of 41.

  • Drew-

    Naples did have a recession. Housing prices (even in the ritzy Port Royal area, which is our equivalent of Greenwich) dropped, the collapse of the construction industry resulted in a 13% unemployment rate in Collier county (where Naples is located), and the number of tourists, upon which the Naples economy is heavily dependent, plummeted.

    From the latest soundings out of the Fed, we may get QE-3, or monetary tightening. Please go to my post at http://www.americanfuture.net/?p=606

    The next time you plan to be in the Naples area perhaps we can break bread together. Just send me an email: mschulman11@comcast.net

  • Icepick

    That’s Florida. We just landed a thousand new jobs in our area. The restaurants are full again. We are not booming, still some houses to sell, but things have definitely picked up.

    We have allegedly added ~25,000 jobs in our area in the last 18 months or so. The only problem with that is I hardly know anyone that actually got a job, and I know a lot more people that are unemployed now that weren’t then. And even with those jobs (apparently spurred in large part by Harry Potter’s Wizarding World), everyone agrees the new jobs are worse than the jobs lost.

    Incidentally, adding 1,000 jobs in Orlando would hardly even be noticed. That just ain’t shit for the 100,000 plus still out of work in the area. (Soon to be larger by several thousands, courtesy of the magical shrinking space program.) Much less the more than one million out of work (officially, by U-3 definition) in Florida or the more than 14,000,000 country-wide. Add in all the people that have dropped out, or the youngsters that never dropped in, and then what? That’s another few million people. Then add in all the part-timers who want full-time work. Then add in all the full-timers making a lot less now because their hours and/or pay have been cut.

    steve, you work in one of those marvelous classes of people (doctors) getting to suck the country dry at the expense of the nearly everyone else. I’m hardly surprised you haevn’t noticed it anymore than our resident millionaires Drew and Michael.

    But here’s the crux of the matter: A lot more people are on the government dole now than ever before. We’re rapidly approaching 45 million people on food stamps, if we haven’t already passed that number. More and more people are homeless. (Officially, my family and I are homeless. Fortunately we had family that could take us in. After the bloodsucking medical establishment gets done sucking my Mother dry and killing her, I have no idea where we’ll end up.) This is happening after two years of RECOVERY. How is this a recovery for anyone but you fuckers at the top of the heap?

    As far as I can tell see the economy is still getting worse for about 90% of the population. Wage growth is actually negative at this point in time for all but the top guys, like you and Michael and Drew, who all espouse your great concerns for the poor. But the rest of us are sinking, some slowly and some quickly. And you assholes that run the country can’t do anything more than cheer on your favorite political teams.

    RMA.

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