Friday, August 15, 2014

Consumer Behavior Changes Before Our Eyes

I was looking at charts at the Atlanta Fed’s Economic and Financial Highlights section of their website, and two in particular stand out to me as illustrative of the narrative of the American consumer. The first is a measure of the Personal Savings Rate vs Real Disposable Personal Income. The 2008 – 2009 Recession clearly delineates two distinct periods, which can easily span two decades if one is allowed to extrapolate out to 2020. Going back to 2000, the data show a downward trend in both the Personal Savings Rate and Real Disposable Personal Income. It is important to keep in mind that wages through this period have not been growing.


The macro-disruptive shocks of the Global Financial Crisis occur, and then the US emerges (technically) from recession. Real Disposable Income has since been trending sideways if not with a downward bias, while the Personal Savings Rate has actually started trending higher, according the chart. This represents the key shift in American consumption behavior, as the rising rate of saving represents both accumulating assets and paying down debt; in a word deleveraging.

To fuel the housing bubble and corresponding economic boom, during a period where wages were not rising but the price of most measures of wealth were, savings were drawn down and a ramp-up in borrowing was observed for most Americans consumers.

It seems the debt-fueled flight was too close to the sun and will be remembered for some time to come. Evidenced by arguably the most materialistic culture on the planet; Americans are starting to postpone the gratification of current consumption for the promise of future accumulated benefit.

The second chart illustrates the constituent measures of Personal Consumption Expenditures. A measure of inflation closely monitored by the Fed.

Although the chart represents both core and headline inflation as measured by the index, their combined overall trends and relationship to the Federal Open Market Committee (FOMC) target of 2% will be the extent of the analysis. Again, going back to the beginning of the chart, the data show inflation actually trending higher. This upward trend in inflation, in the years leading up to the Global Financial Crisis, was the factor eroding away at the purchasing power of American paychecks, and so was being offset with the drawing down of savings and the accumulation of debt.

Again, the 2008 – 2009 Recession clearly delineates two distinct periods; the first characterized by inflation trending higher and at times being measured above the FOMC long-term target of 2%. The period after the macro-disruptive shocks of the Global Financial Crisis occur, is characterized by inflation, as measured by the index, trending sideways and persistently below the FOMC 2% target.

This break in inflation that has so many very smart people worried about the soundness of the recovery is actually a hidden benefit. Even though there still is no real upward pressure on wages, the low inflation environment is giving the American consumer room (albeit thin) to save and consume at more modest levels.

Now that the American consumer has demonstrated that sometimes you can teach an old dog new tricks, we wait for Washington to fall in line with the pack.      


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