Two Amazing Graphs About Consumer Spending

Calculated Risk has a post that must be seen to be believed. First off, look at personal consumption in February, which is back at pre-recession highs. This is quite amazing, and I admit, I am completely flabbergasted. No way did I think that consumer spending would rebound and that is a big assumption in my belief that we are going to have a double dip recession (well more to the point it still hasn't ended) in the near term. This may look positive, but then look at the second graph: personal income minus transfer payments, which are direct payments by the government to individuals. That measure never rebounded and is still near the cycle low, even decreasing in February. This measure really captures the importance of government payments in trying to plug the consumer spending graph; it is about $800 billion (~8%) below the pre-recession high.

So what does this mean? Looking over time it is another measure clearly showing that the nature of recessions has changed in the past few decades. Every recession before the 2001 recession had the personal income minus transfer payment measure trough be coincident with the end of the recession and equaled or exceeded post recession highs within one year. The 2001 recession did not start increasing for nearly 16 months after the official end. Of course in that recession the measure was flat instead of dropping precipitously like we have seen. These measurements are demonstrative of the structural imbalances in a labor market that is growing increasingly unable to create jobs; indeed the post 2001 recession saw job creation begin in the middle of 2003, due to being in the middle of the biggest housing bubble in history.

It also means that government outlays are responsible for holding our economy in its current stagnant state, a situation that led to a combined deficit of nearly $3 trillion in the 2009 and 2010 fiscal years. I view it as a high stakes game of chicken with a catch 22 built in. The government cannot keep running such high fiscal deficits for very much longer, and as long as sustainable consumer demand is depressed then ending the high deficits will lead to another major recession; however if the government spends too much time trying to keep the system propped up then interest rates and debt loads will be so high that it will severely hurt us in the coming decades. On the other hand sustainable consumer demand can only grow based on secure job growth but companies won't hire until they see it happening already. In the past increased short term government spending was enough to jumpstart the recovery, an outcome that seems far from certain now.

It reminds me of the most misused medical device on TV: the defibrillator. On the shows it is a magical device that is readily applied to everyone that has no pulse or looks like they are dead, miraculously saving or tragically failing based on the needs of the plot. In reality defibrillation only works when the heart is still beating, just not paying attention to the pacemaker or going through the cycles needed to pump blood. With the same symptom (i.e. no pulse) the treatment will be successful or not depending on state of the heart, if there is no rhythm (asystole) then defibrillation doesn't work. My concern is that by ignoring the underlying state of the economy we are not giving the proper treatment and our current fibrillation will turn into asystole.

As wikipedia states:

Ventricular fibrillation is a medical emergency that requires prompt BLS/ACLS interventions because should the arrhythmia continue for more than a few seconds, it will likely degenerate further into asystole (a flat ECG with no rhythm- which is usually not responsive to therapy unless there is still some residual fine VF rhythm left or the patient is otherwise lucky AND is treated very quickly); after this, within minutes blood circulation will cease, and sudden cardiac death (SCD) may occur in a matter of minutes and/or the patient could sustain irreversible brain damage and possibly be left brain dead (death often occurs if normal sinus rhythm is not restored within 90 seconds of the onset of VF, especially if it has degenerated further into asystole).

To really stretch the analogy we can say that the response so far as been to give CPR by pumping the system with money, and I just hope that the focus turns to getting the rhythm back instead of declaring victory and letting asystole form.