The latest round of consumer-related data, including last week's retail sales for December and January's Consumer Sentiment index, suggest that the reality of the household sector's situation is at least as bleak as had been feared.
These reports showed that it is not just the actual spending that has suffered greatly in the last two quarters but also that the consumer's mood has turned alarmingly sour during that period.
The severe pressure under which households have come over the last six to nine months is the result of a rare convergence of negative factors: a housing market meltdown, a semi-collapse of equity prices, rapidly eroding labor-market conditions, and the sharp tightening of bank lending standards. The dramatic decline in gasoline prices during that period has been no match for the highly potent combined impact of the other factors.
The stark picture of the latest retail sales report consisted of not just another sizable decline in December's retail sales (-2.7%) but also in the significant downward revisions to the originally reported declines in both October and November.
Personal consumption, which already contracted by a stunning 3.8% rate in the third quarter (in real terms) probably declined by another 3% or so in the fourth quarter of 2008, reflecting a major retrenchment in household spending. In view of the approximately 70% weight of consumer spending in GDP, this downtrend is a very potent drag on the overall economy and points to a contraction of about 6% in real GDP for the fourth quarter (scheduled for release on Jan. 30).
The declines in December's retail sales were widespread among all of the key categories, including a nearly 16% decline in gas-station sales (mostly the result of the ongoing slide in crude oil prices last month), while building materials, general merchandise store sales and auto sales all recorded significant declines as well.
As consumers remain squeezed, they're likely to keep delaying purchases of non-necessity and big-ticket items by, for example, driving their older cars longer instead of trading them in. On the retail front lines, the first half of 2009 will be "extraordinarily challenging," Wal-Mart's CEO warned last week.
In the search for a silver lining, one can take consolation in the rise of the personal savings rate in recent months. The rate, which is expressed as a percent of disposable personal income, rose in 2008, although in a very choppy fashion, by roughly two and a half percentage points, to 2.8% in November. This upswing in the savings rate reflects the fact that income growth has been exceeding that of spending, as the mounting anxiety of households over their job prospects and the dramatic shrinkage in the value in their stock market investments fuel a desire to save a bigger share of their current income.
The improvement in the savings rate, which in recent years has been consistently identified as a trouble spot for the U.S. economy, is a mixed blessing in the current environment as, by definition, it will keep on restraining spending and delay the prospect of an economic turnaround in 2009.
Indeed, the increased savings rate may be a virtuous thing, but the reason Americans are doing it is their bleakly pessimistic attitude toward the economy and where they think it's going. The key Reuters/University of Michigan consumer sentiment index remained at historically very low levels in early January despite its modest rise to 61.9 from November's reading of 60.1 (which was the lowest for the series since June 1980). The index consists of two components: current conditions and expectations. The current-conditions component continued its longstanding slide in early January to 69.2, down from 69.5 in December, while the expectations component bounced by about three points but remains at dismally low levels. The overall Consumer Sentiment index has deteriorated precipitously in the last 18 months or so from about 90.0 to a level of 61.9 in January.
Despite the disheartening picture painted by such surveys, one needs to see them for what they truly are, which is a simple measure of consumer psychology. If other conditions that are currently impairing the ability of consumers to spend start improving gradually, sentiment indicators will rebound fairly quickly in response to the turnaround in those underlying factors.
For now, though, with the stock market under unrelenting pressure, the housing market still in the search of a bottom, and the banking system having its own arduous long road to recovery ahead, the medium-term prospects for the consumer sector can only be described as very guarded.
Anthony Karydakis is a former chief U.S. economist with JP Morgan Asset Management and currently an adjunct professor at New York University's Stern School of Business.
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