Weekend Round-Up: Consumers and Incomes

The financial press is, as usual, desperate for any news that justifies an optimistic headline. So you will be reading tomorrow about how consumer sentiment and incomes have made progress in the last couple of months.

Be careful.

Yes progress has been made.

But we still have the training wheel firmly attached to this recovery. The entire edifice is very wobbly and could topple with the slightest provocation.

First: consumer sentiment. The cause for celebration here is that the overall consumer sentiment index edged up at the end of August leaving us with a couple of months of progress. Consumers can hardly be described as happy, but everything is relative, and they are clearly feeling a little better than they were in the spring. The problem is that the underlying data provides some fairly miserable reading: when asked about their individual situation – rather than what they thought of the economy as a whole – the answers are considerably more bleak. Still. For instance, consumers think their finances are pretty terrible. That question scored the worst response since it was first asked in 1946.

Obviously we remain on the cusp of recovery. Even if the economy finally exits recession, which it will do this quarter, consumers are very likely not to feel any better off in the near future. We have discussed that here before: without more jobs consumer sentiment will stay sketchy to put it mildly.

Sometimes the financial media grasp at these little advances and then translate them into fantastic visions of imminent glory days. That’s just silly. We have a very long way to go before we get back to a sustainable recovery and consumers seem to have a very pragmatic handle on that reality. More so, I might add, than the experts on Wall Street.

Having said that I should remind you that once we do get the economy running by itself, without government stimulus, we should experience a few quarters of much higher growth than we would normally expect. The reason for this is that history tells us the economy accelerates beyond a sustainable rate to make up for the period it was underperforming. With so much slack now available for use, I think it likely growth will be rapid for a while – until that slack is used up. Then we will settle back to ‘normal’ growth.

But we have a way to go before we arrive at that point. And consumers are aware of the battle ahead.

Not least because of their incomes.

So, second: according to today’s report, personal incomes were flat in July and savings fell back to their springtime levels. Consumption edged up very slightly, mainly due to auto sales.

What to make of this?

The income news is obviously not too encouraging. The good news is that that data for a couple of earlier months was revised upwards, which leaves us with a better story to tell over the entire quarter rather than for last month alone. Nonetheless, wages are still a weak point – lack of jobs and shorter work weeks again being the cause – and will continue to undermine progress.

The slight uptick in consumption was distorted by the ‘cash-for-clunkers’ program that drove car sales up. Anecdotal evidence for the first post-program week is that auto sales crumbled immediately the it ended. Score another victory for the stimulus program, but we should be concerned about the potential sustainability of the recovery based upon the more recent information. The sudden post-program drop in sales seems to suggest that sales were bunched up by the incentive, and that sales for the rest of the year were brought forward as consumers took advantage of it.

The drop in savings falls into that bucket known as: ‘duh!’. Those of us who argued the stimulus should have no tax refunds in it can now smile. The data clearly shows that consumers saved those refunds and did not spend them. There was no stimulus effect from that portion of the package. I wonder how many times we will have to repeat this charade before politicians get the message: tax refunds are far less effective than direct spending as a form of economic stimulus. In the space of a few years we have had two instances that support this: the failure of the Bush tax cuts to kick the economy into gear in the aftermath of the 2001 recession, and now this. Perhaps we can now all get over this tax cut obsession.

Especially since the long term fiscal health of the country requires a more balanced approach to revenues.

But that’s a debate for another day.

Today we should simply focus on the consumer, who seems to remain mired in transition and suspicion. Uncertainty is still the watchword, given the most recent data.

Yes the recession is almost certainly over.

But so what?