The Wall Street Journal says Consumers Can’t Keep Driving the Economy.

Gross domestic product grew at 2.6% annual rate in the fourth quarter, the Commerce Department said Friday. That was slower than the 3.2% it clocked in the third quarter and the 2.9% that economists expected.

A quick look under the hood shows that when it comes to demand, things are doing just fine. Personal spending grew at 3.8% rate, setting its fastest pace in three years, while capital spending growth hit 6.8%. The drags came from companies adding less to their inventories and an expansion in the trade deficit. Really, this just counts as a payback for the third quarter, when inventories and trade boosted growth.

The concern is whether demand will stay strong. Consumer spending has been regularly outpacing income growth and, as a result, people are saving less and less. The personal saving rate (the share of after-tax income that isn’t spent) fell to 2.6% in the fourth quarter from 3.3% in the third quarter. That compared with 6.1% two years earlier and was the lowest level since 2005, when the housing bubble was at its height.

The Journal's conclusion is "without wage increases spending growth will have to slow," and the economy with it.

Mixed Bag

Earlier today, in Weaker Than Expected GDP: Mixed Bag or Worse? I made this claim: "Despite all the crowing about consumer spending, recall that it is occurring only because of an unsustainable drawdown in savings."

An astute reader commented, "Don’t you expect a drop in savings when 10K people earning good money retire each day?"

That's a good point. And it is part of the picture, but only a part of it.

I replied "The other side is rising credit card and auto defaults and Millennials racking up purchases they cannot afford (24% still paying Christmas of 2016). The next set of [Christmas credit card] numbers is guaranteed to be worse."

Note the saving's spike in 2012 to 9.2%.

Were not hoards of boomers retiring then? What's the difference between then and now?

Wealth Effect


The difference between 2012 and now is the wealth effect from a booming stock market.

In 2005, people actually believed their home was their retirement vehicle and prices would rise forever. Today's widespread belief is stock prices only go up. In 2012, many retirees were concerned their stock nest egg would not last long enough.

Retirees can spend at will as long as they believe stock prices will rise more than their yearly needs.

Millennials who have few assets are not in the same boat. Millennials just need to believe they will have a job or alternatively they need to believe "the future is now so who cares?"

Haunting Math

Twilight Zone

Can Spending Drive the Economy?

  • In the case of millennials and those without assets, only as long as income keeps up with payments. Alternatively, only as long as a "What, Me Worry?" attitude persists.
  • In the case of retired boomers living in wealth-effect Fantasyland, only as long as sentiment towards equities lasts.

From a GDP perspective, spending (even government waste) is the economic driver.

More accurately, spending does not drive the economy. Production is the true driver.

Mike "Mish" Shedlock​

Consumer Spending Propping up GDP: How Long Can This Go On?

The second estimate of GDP, released this morning was an as expected 2.0% reading. Consumers carried the load.

Bond Market Dislocation: What the Hell is Going On?

The "Bond Freak" is wondering what's going on. I have an answer from Lacy Hunt at Hoisington Management.

GDP a strong 4.1%, Saving Rate Revised Much Higher, Talk of Overheating

The BEA released the 2nd Quarter 2018 GDP (Advance Estimate) including a Comprehensive Update: 1929 Through 2018 Q1.

Stock Ownership Rate Plunges as Credit Card Debt Soars

The savings rate is at a 12-year low. Revolving credit is at a record high and the stock ownership rate has plunged.

Personal Income Up 0.1%, Spending Up 0.6%: What's the Problem?

Personal Income is up 0.1%, spending is up 0.6%. Real Disposable Income is up 0.1%, real spending is up 0.4%.

Home Ownership Rates Vary Wildly: What’s Going On?

Reader Duncan Burns, a writer for the “Valley Patriot”, a local newspaper in North Andover, Massachusetts pinged me with an interesting chart on the home ownership rate in Massachusetts.

S&P 500: How Long Can This Go On?

The S&P 500 is testing the 2550-2600 level for the 6th time this year. How long does this go on?

It's Likely You Can Refinance Your Mortgage At a Lower Rate

Mortgage rates are approaching record lows. Investigate refinancing.

Consumers Tap Savings to Spend at Fastest Pace Since 2009: Real Income Drops, Core Inflation Slight

In the wake of the hurricanes, consumers tapped savings to spend at the fastest paces since August 2009. Core PCE inflation (not counting food and energy) was 0.1% but overall PCE inflation was 0.4%. The savings rate is the lowest since 2008.