Sunday, July 17, 2011
Leonhardt: “We’re Spent”
by CalculatedRisk on 7/17/2011 08:47:00 AM
From David Leonhardt at the NY Times: How the Bursting of the Consumer Bubble Continues to Hold the Economy Back (ht Ann)
THERE is no shortage of explanations for the economy’s maddening inability to leave behind the Great Recession and start adding large numbers of jobs … the real culprit — or at least the main one — has been hiding in plain sight. We are living through a tremendous bust. It isn’t simply a housing bust. It’s a fizzling of the great consumer bubble …
The auto industry is on pace to sell 28 percent fewer new vehicles this year than it did 10 years ago — and 10 years ago was 2001, when the country was in recession. Sales of ovens and stoves are on pace to be at their lowest level since 1992. Home sales over the past year have fallen back to their lowest point since the crisis began. And big-ticket items are hardly the only problem.
The Federal Reserve Bank of New York recently published a jarring report on what it calls discretionary service spending, a category that excludes housing, food and health care and includes restaurant meals, entertainment, education and even insurance. Going back decades, such spending had never fallen more than 3 percent per capita in a recession. In this slump, it is down almost 7 percent, and still has not really begun to recover.
Business executives are only rational to hold back on hiring if they do not know when their customers will fully return. Consumers, for their part, are coping with a sharp loss of wealth and an uncertain future
Here is the NY Fed paper by Jonathan McCarthy that Leonhardt mentions: Discretionary Services Expenditures in This Business Cycle
The pronounced weakness in personal consumption expenditures (PCE) for services has been an unusual feature of the 2007-09 recession and the slow recovery from it. Even in 2010:Q4, when real PCE increased at a relatively robust 4.1 percent annual rate, real PCE on services rose at only a 1.4 percent rate. This weakness has been especially evident in “discretionary” services (to be defined below), which fell more in the recent recession than in previous recessions and since have rebounded more sluggishly. In this post, I suggest that the continued sluggishness in these expenditures lends a note of caution regarding the sustainability of recent PCE strength. … this in turn raises some concern about the future strength of the recovery.
The chart below shows how much real per capita (to account for differing rates of population growth over time) discretionary services expenditures fell from their previous peak—a zero value in this chart means that these expenditures were above their previous peak. The drop in discretionary services expenditures in the last recession was much more severe than in previous recessions …