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Consumer Spending: The Unconventional Views Are No Different

The government's measure of consumer activity, personal consumption expenditure (PCE), is the granddaddy of all statistics on the U.S. economy, considering that about 70 percent of GDP is at the consumer level. We get a reliable measure on PCE once a month, but that update includes a lot of things that don't change much, such as the purchases of food and fuel and electricity that everyone has to make. But there are a few new statistics that clever people have put together, collecting data in real time and looking at consumption through different lenses. The problem is that they're all showing the same results -- the momentum gained in spring 2010 is slowing.

PCE first broke through $10 trillion, measured at an annual rate, in December 2007. Growth in PCE, however, has been steadily slowing for a long time:

Click on the graph for a larger image
And the drop in PCE during the current slowdown was much sharper than even the severe 1981 recession. Spending dropped off a lot in the 1960 recession, but did not show negative year-to-year comparisons until 2008 and 2009.

New data collection methods allow economists to look at consumer data more quickly and in greater detail. Here's a look at two of them.

The Consumer Metrics Institute (CMI) is a company in Colorado that compiles indexes of consumer spending, but only discretionary purchases, and only what is bought over the internet. I suppose that's the leading edge of consumers, who probably have more to splash around than the average person.

CMI acknowledges that the purchases it tracks are likely to be more volatile than the totals, but likens its sample group to an American football team's starting quarterback, in that the quarterback is a reliable predictor of a team's overall performance. They've been at it for five or six years, says the firm's web site, but they claim that their focused measures of consumer spending have tracked the broad economy fairly well. Here's their last index release:

They also publish very detailed indexes of spending across 10 industries. Recent news there is not very encouraging either.

CMI pointed out that when the Bureau of Economic Analysis revised its numbers to show that the bottom of the recession occurred in 4Q 2008 rather in 1Q 2009, it squared with what CMI had known all along, to wit:

However, the information they gather with these new methods news is not encouraging. Notice the sharp and sustained drop, with no relief in sight, from about a year ago. This translates into a disappointing trend in terms of expansion and contraction:

[Our] Daily Growth Index has reached a year-over-year contraction rate of 5%, and it is rapidly closing the gap on the worst contraction rate observed during the 2008 Great Recession.

The CMI data is gathered and evaluated daily, and the firm also notes that the very bottom of internet discretionary spending was the day of 2008 presidential election.

They also caution us to pay attention to the tone of political discourse up to the mid-term elections:

Three days after the election, the very worst of the "fear, uncertainty and doubt" ("FUD") had passed, and consumers resumed their earlier upward trending demand. The subsequent growth resulted in daily year-over-year net growth by the end of November and 10% daily year-over-year growth by Christmas.
If nothing else, the daily resolution in our data suggests that:

â–º In 2008 political "FUD" exacerbated (to at least some extent) the Great Recession.

â–º Any political "FUD" in the second half of 2010 might do the same thing to the current Great Recovery, such as it is.

The bottom line? A good predictor for the course of the Great Recovery over the next 90 days might be whether U.S. politicians are collectively singing "Kumbayah" or "Eve of Destruction".

Another private-sector, real-time measure comes from MasterCard Advisors' Spending Pulse. It's broader in scope than the CMI survey, measuring purchases in the real world as well as online; it starts with MasterCard's own numbers, and estimates transaction volumes for other means of payment.

Spending Pulse reported that July 2010 saw higher spending than June, but just barely -- up 0.1 percent seasonally adjusted. Year over year, July was up 1.0 percent, compared to June's 1.1 percent growth.

The MasterCard Advisors SpendingPulse news comes along with video comments. They say that even the big spenders are holding back, so that July's sales of jewelry and other luxury goods were flat with June. Any areas that did pick up in the spring are losing steam. The Spending Pulse economists said to watch for a pickup in August from back-to-school spending, but their body language was no more encouraging than the wry political commentary from CMI.

More spending requires new jobs, but there won't be a pickup in hiring until people are spending more money. What's the answer? Tax credits to business for hiring people? (We tried that, sort of.) Maybe the big Fed powwow today and tomorrow will throw off some spark of an idea.

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