This may be the age of austerity, but consumer spending has surprised the pessimists and rebounded sharply over the past year. That’s no trivial revival, considering that personal consumption expenditures (PCE) represent 70% of GDP in the U.S. For good or ill, ours is a consumer-based economy. But is the consumer still up to the job?
For reasons that need no explanation, there’s some doubt if Joe Sixpack can continue his spendthrift ways. For the moment, however, it’s clear he’s making a valiant effort. The year-over-year pace of growth in seasonally adjusted personal consumption expenditures has revived to almost 4%, as of last November. That compares with a roughly 2.5% decline in the depths of the Great Recession.
But it’s also clear that PCE isn’t growing as fast compared with the pre-recession gains, when 4% to 6% was typical. For the moment, those rates exist only in history. The next update on PCE is scheduled for release on January 31, when the government reports the December numbers.
Ultimately, consumption and the labor market are tightly connected. But if a robust employment trend is at the heart of spending, the latest jobs report leaves plenty of room for doubt about the future. Private payrolls are growing, but the trend appears to be stuck in a below-average range, which suggests that PCE will suffer headwinds in the year ahead.
One of those headwinds is the reluctance to borrow at anything close to the levels seen before the recession. Total outstanding consumer credit, for instance, is roughly 7% below the cyclical peak set in 2008, and the trend of late offers limited support for thinking new highs are coming any time soon. Total outstanding consumer credit is still contracting on a year-over-year basis, falling by a bit more than 2% for the year through last November. The self-imposed austerity is fading a bit, but it’s an open question if this trend will sustain itself and run up borrowing to levels of yore.
Haver Analytics reports that over the past decade there’s a 60% correlation between the annual rate of change in outstanding credit and consumer spending. By that standard, it’s still too early to dismiss the austerity factor.