Thursday, December 23, 2010

The recovery in consumer spending

The top chart shows the level of real personal consumption expenditures over the past 40 years, while the bottom chart shows the year-over-year change in real spending. In inflation-adjusted terms, spending has increased about 150% since 1970, with the apparent trend (green line) being about 3.3% per year annualized. Real spending over the 12 months ended November '10 rose 2.8%, half a percentage point below its long-term average growth rate.

The level of real spending now exceeds the peak of late 2007, so we've already had what might be called a "recovery" of sorts. But to get back to our 3.3% long-term growth path (we're about 8% below that path currently), real spending would need to increase by more than 3.3% per year. A 5% annual increase in real spending would get us there in just over 5 years. That sounds almost impossible in today's climate, but it would be consistent with the economy's demonstrated ability to bounce back from adversity over and over again, and it would give us growth approaching that of the heydays of the Reagan boom in the 1980s. And although nobody seems to be giving the consumer much credit these days, real consumer spending is already up at 4.3% annualized rate over the past three months.

What would a full recovery to trend growth look like? Well, if Congress can slow the growth of federal spending, broaden the tax base by eliminating deductions, and reduce and flatten tax rates, I'd be willing to bet we would enjoy a handsome recovery in the years to come, and it's not impossible at all.


Gene Prescott said...

<<...broaden the tax base by eliminating deductions, and reduce and flatten tax rates, I'd be willing to bet we would enjoy a handsome recovery in the years to come,...>

The latest legislation didn't do any of those tax things, as a perusal of my latest "tax tips" disclose:

Public Library said...

I think we need to shift incentives from consumer spending to investment. This will result in a very bright future.

Achieving what you layout will only set us back further in the long run and is not a destination I want to visit.

Scott Grannis said...

Gene: You are correct, but I hold out hope that the next Congress can do better.

Scott Grannis said...

Public: You are correct. Spending does not drive the economy, investment does. If the next Congress can improve the tax code, that should boost investment and spending will follow.

Benjamin Cole said...

In general, I agree that consumption, not investment, should be taxed.

And yet, we have global gluts of capital now--while demand is weak.

Has the world changed while we weren't looking?

Cabodog said...

Scott, no other place to post it, so will do it here: Merry Christmas to you and your family. Health and prosperity for the coming year.

Thank you so much for taking your time to share your thoughts. It is greatly appreciated.

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