Earn What You Spend

Yesterday, expected but still unwelcome news hit the market: real GDP fell by .3 percent in the third quarter of 2008.  According to the Bureau of Economic Analysis:

the decrease in real GDP in the third quarter primarily reflected negative contributions from personal consumption expenditures (PCE), residential fixed investment, and equipment and software that were largely offset by positive contributions from federal government spending, exports, private inventory investment, nonresidential structures, and state and local government spending. Imports, which are a subtraction in the calculation of GDP, decreased.

So what does this mean?  GDP — a measure of the output of all goods and services — fell, and that fall was led primarily by “negative contributions from personal consumption expenditures.”  Translation:  consumers are spending less, and that is having an effect on the overall economy. 

Felix writes ”the headline -0.3% figure isn’t the worst bit: that would be the 8.7% fall in disposable personal income.”  The real issue is that consumers are spending less and less. Now, we’ve talked about this before - if you have previously financed practically every expenditure through debt, if an entire generation has grown accustomed to living beyond their means, then the pull-back in consumer spending we’re seeing is necessary.  We’ve spent more than we’ve earned for too long, and it is beginning to catch up with us. 

But this pullback has unwelcome ramifications.  Take a look at this graph the Real Time Economics blog at the WSJ put together with data from the Commerce Department: 

According to Phil, the author of the post, “the attached chart shows what GDP would look like without consumer spending. GDP would have been negative four times in that last four years if not for spending. At some 70% of GDP, consumer spending can be a major benefit, or as we’re seeing now, a major drag.”

Notice the real disparity between the two - without consumer spending, we never really would have made it out of the previous recession.  So, it seems to me, the growth we’ve seen in the past few years is a bit of a mirage, most of which was financed through debt.  That is fine for the short term, especially in an environment like the current downturn (again, thinking of Keynes).  But it is untenable over the long term.   We keep moving more solidly into being a debtor nation at every level (consumer, corporate, national), and eventually we have to start making those margin calls. It seems that time is now.