Gary Shilling: The US economy is doomed without consumer spending

Source: Shutterstock.

The US Commerce Department said on Thursday that consumer spending fell 0.4% in February from January after adjusting for inflation.

It may not seem like much, but actual spending has fallen in three of the past four months. Without strong household spending, economic expansion is doomed.

Capital spending provided a modest boost to the economy, but failed to recoup 2020 losses as business uncertainty and excess capacity persisted.

The federal government has provided $4.6 trillion in fiscal stimulus since the pandemic began, but nearly half of that was money transferred to businesses and households, saving about $75 % of payments, according to surveys by the Federal Reserve Bank of New York.

As for the money Washington spent directly on government employee salaries, tanks, etc., it was only $1.5 trillion out of total budget expenditures of $7.0 trillion and the amount has plummeted. in four of the last five quarters in real terms.

In the third quarter of 2021, inventory building accounted for 99% of the 2.3% rise in real gross domestic product at annual rates and 78% of the 6.9% rise in the fourth quarter. Much of the inventory accumulation was due to the anticipation of robust consumer spending if households dipped into their excess savings. But they didn’t.

Thus, the liquidation of excess inventory this year will hamper economic growth. Additionally, the chronic and growing international trade deficit is a drag on the US economy as small business optimism plummets.

Mortgage mess

The increase in mortgage rates from 3.22% at the start of the year to 4.67% recently, the absence of new government payments to households inspired by the pandemic and the completion of the big city apartment rush. residences in suburbs and rural areas should deflate the single-family housing bubble.

Existing home sales fell 7.2% in February from January and 2.4% from a year earlier. The impact of weak housing roughly doubles when furnishings, brokers’ commissions, moving costs and other related expenses are included.

Meanwhile, inventories of new homes for sale are at their highest since mid-2008 and will continue to climb even as demand declines. The National Association of Home Builders’ market index fell from 10 in 2008 to 79 in March, with 50 being the dividing line between growth and contraction.

Meanwhile, in response to high inflation, the Federal Reserve embarked on a campaign to tighten monetary policy by raising interest rates. Such reversals often lead to recessions, which is even more likely now that the central bank is moving from injecting $140 billion a month into the financial system by buying Treasury bills and mortgage-backed securities to reducing its accumulated portfolio by $8.9 trillion.

The inversion of the Treasury market’s yield curve, with yields on 2-year notes rising above those on 10-year notes, is another worrying sign given its history of previous recessions.

The same goes for the decline in stock prices in the first quarter, with the Dow Jones Industrial Average down 4.6%, the S&P 500 index down 4.9% and the Nasdaq Composite index down. 9.1% compared to the beginning of the year. In the post-World War II era, bear markets have always preceded or coincided with spikes in trading activity.

Of course, the global political, economic and financial disruption caused by Russia’s invasion of Ukraine adds additional recessionary pressures.

“In the hands of households”

Thus, the US economic outlook is in the hands of households, and their purchasing power is falling. Average hourly wages rose 5.6% in March from a year earlier, the Labor Department said Friday, but as impressive as that sounds, it’s still below the 7.9% jump in the consumer price index.

And households are reluctant to spend their accumulated savings, with the University of Michigan confidence survey showing a 30% drop in confidence over the past year.

Moreover, there is no evidence that households expect inflation to remain high in the coming years and will therefore rush to buy goods now before prices rise even more, as they did at the end of the last few years. 1960s and in the 1970s.

Such excess demand strains inventory and capacity, so prices rise, confirming inflation expectations and generating a self-reinforcing spiral. Today, however, New York Fed surveys show consumers expect annual inflation of 3.8% over the next three years.

In addition, the purchasing power of households is hampered by the abandonments of the active population inspired by the pandemic. Labor force participation rates of 68.3% for men and 56.6% for women remain below pre-pandemic levels of 69.3% and 57.9%. In addition, 1.5 million more workers retired earlier than expected by past trends, according to the Dallas Fed.

Instead of spending their savings, Americans continue to reduce debt relative to their after-tax income. The appreciation of owner-occupied homes and equity portfolios since the start of the pandemic are also potential sources of funds to fuel spending.

But the predominant owners of these asset classes are high-income households that have already met their spending wants and needs and don’t react much to asset price swings.

After-tax household income jumped with each of the three stimulus rounds, but consumer spending fell after the first round in 2020 and barely budged with the second and third payments in 2021. Since the pandemic hit the At the start of 2020, after-tax income increased by $1.7 trillion, but consumer spending increased by a bit more, at $1.9 trillion.

With real incomes falling and U.S. consumers reluctant to spend their accumulated savings from pandemic-related stimulus, let alone spending current incomes, economic growth this year will be minimal. And this can be negative, because the previous accumulation of stocks is reversed.

For more Bloomberg Opinion columns, visit

Gary Shilling is president of A. Gary Shilling & Co., a New Jersey consulting firm, registered investment adviser, and author of “The Age of Deledging: Investment Strategies for a Decade of Slow Growth and Deflation.” Some of the portfolios he manages invest in currencies and commodities.

Comments are closed.