Timothy Geithner engaged in some painful truth talking the other day on the slow pace of the economic recovery. The Treasury Secretary stated that for many people "it's going to feel very hard, harder than anything they've experienced in their lifetime now, for a long time to come." New research from the Federal Reserve Bank of San Francisco offers one stark explanation for why we're stuck in this long slow slog. In a word: spending. No, not the federal spending that is front and center as Washington lurches to . We've got a consumer spending problem. Namely, that we're not spending anywhere near what we were shelling out before the Great Recession began. That's basically left the economy in the same shape as Alex Rodriguez and his torn meniscus: slowed down and lacking power.
Spending Down $7,356
Kevin Lansing, an economist at the Federal Reserve Bank of San Francisco, took a look at how our current personal spending compares to what we would have spent if we had continued at the hectic, bubble-induced pace that ensued from 2000 until the Great Recession began in December 2007. According to Lansing, average per-person spending was $7,356 less (in inflation-adjusted dollars) than if our pre-recession spending spree had continued apace. That works out to $175 less per month that we've each been circulating back into the economy. Which goes a long way to explain why the economy isn't exactly humming these days.
The Payroll Tax Offset
As it turns out, that $175 per month decline in consumer spending is about what high-income earners are saving this year courtesy of the reduction in the Social Security payroll tax meant to stimulate the economy. The maximum annual savings from the 2011 payroll tax break is $2,136 for anyone making at least $106,800 this year, which works out to a maximum monthly savings of $178 per month. But it's not as if we're sitting around mulling how we can jump-start the economy by spending that extra money in our paychecks. Fact is, that $178 a month is pretty much being eaten up by higher gas and food costs.
The Long Hangover
Nor is anyone suggesting that it would in fact be a good thing if we could just hit the rewind button and get back to our pre-recession spending levels. The problem is not so much our current spending rate but that our spending was on steroids from 2000-2007 courtesy of inflated housing values. As the Fed's Lansing told Bloomberg:
"People are wondering why consumer spending is so slow these days. What they should be asking is: Why was it so strong in previous years? You're comparing it to an artificial economy that was driven by debt. We're not going back to that kind of spending growth unless we have a big run-up in housing prices again, or a change in labor markets that makes people's income go up."
With home values still struggling to stop their epic slide and last week's news that the official unemployment rate had ticked up to 9.2 percent, it's pretty clear neither trigger is on the horizon. In fact, Lansing notes that as of May, we were 42 months past the start of the recession, and yet consumer expenditures are still 1.6 percent below their pre-recession peak. That's nearly twice as long as it took for spending to get back to its peak level after the 1990-91 recession.
Our economy faces a far longer rehab than ARod's expected six weeks on the disabled list; it takes time to recover from debilitating and outsize bubbles. And the consumer spending bubble was both. Look no further than the shadow inventory of distressed and foreclosed homes. Until those work their way through the market, home prices will remain under pressure. That will keep household net worth down, and until we all see an uptick in that telling stat, we're not going to be in much of a mood -- or shape -- to increase our spending (albeit at a healthy non-bubble pace). Moreover, the recovery could be even further impeded if we end up with a milquetoast debt/deficit deal that is devoid of any clear initiatives to spur job growth. There are still 14.1 million unemployed Americans in no position to spend.
Photo courtesy Flick user taberandrew
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