Consumer spending fell in September, as incomes flat

by Michael Smith (Veshengro)

WASHINGTON, D.C., USA - Consumer spending fell in September by the largest amount in nine months. This reflects the end of the American government's “Cash for Clunkers” auto sales program.

Incomes, the fuel for future spending, at the same time were were flat and have not increased. In some industries, in order to preserve their jobs, workers have taken pay cuts rather than the company or authority needing to let go of people. Others have accepted pay freezes for the same reason and without additional income consumer spending will not rise.

While the US government reported that the overall economy grew in the July-September period, signaling the end of the worst recession in seven decades, the weakness in spending and incomes as the quarter ended underscores the fragility of the recovery.

Britain is officially still in recession and the country was still in negative growth, so to speak, of some serious figures.

Economists worry that the recovery could falter in coming months, in the USA and other western nations, if households cut back on spending to cope with rising unemployment, heavy debt loads and tight credit conditions.

Ian Shepherdson, chief U.S. economist at High Frequency Economics, wrote in a note to clients that with incomes so soft, increased spending will be a struggle.

The Commerce Department said that spending dropped 0.5 percent in September, the first decline in five months. Personal incomes were unchanged as workers contend with rising unemployment. Wages and salaries fell 0.2 percent, erasing a 0.2 percent gain in August.

A second report showed that wages and benefits including health care rose just 1.5 percent for the 12 months ending in September. That's the smallest increase for the Labor Department's Employment Cost Index on records that date to 1982.

The concern is that much of third-quarter growth stemmed from temporary government programs such as the clunkers sales incentives that ended in August.

The government said that the gross domestic product, the broadest measure of economic health, expanded at an annual rate of 3.5 percent in the third quarter, the first increase after a record four straight declines. A 3.4 percent rise in consumer spending, which accounts for 70 percent of total economic activity, powered the gain.

Some economists believe that consumer spending will slow sharply in the current quarter, lowering GDP growth to perhaps 1.5 percent. Analysts said the risk of a double-dip recession cannot be ruled out over the next year.

European bank chief, including the European Central Bank and the Bank of England, have concluded that we are headed with a double-dip recession, in Europe at least.

The 0.5 percent drop in consumer spending in September in the USA followed a 1.4 percent surge in August which was propelled by the big jump in car sales that month as consumers rushed to take advantage of the clunkers' incentives.

September's drop in spending resulted in a boost in the savings rate to 3.3 percent of after-tax incomes, up from 2.8 percent in August. Many analysts believe households will keep striving to increase savings in the months ahead to replenish nest eggs that were crushed by last year's stock market crash. That also would hold back spending in the months ahead, weakening the recovery.

We may also find that many people have decided to, aside from saving more, much more, to pay off their debts, on credit cards and others, in order to free themselves of those, rather than buy new stuff. And, do we really all the time need to buy new stuff? I know the retailers and even government would like us all to to boost the economy but...

Inflation, on the other hand, remains in check, both in the USA and in Europe, including and especially Britain. But it is Britain which still in in a recession while other countries of Europe, such as Germany and France, report growth, positive growth, as did the USA.

Spending does not seem to have gone down that much in Britain, though, especially with the advent of the Digital TV era now where more and more regions are switching over to digital and people throw away – without need in most cases – their old TV sets to buy new digital ones.

This can be seen also in parks and open spaces where the number of dumped TVs is rather on the increase; TVs that are perfectly good and that need but a set-top box in order to receive the digital signals.

The two nations, that is to say Britain and the USA, are different in the approach by the people, if would appear. Britain has very much become a “throw away” society, sadly, rather than one that fixes things up, as we used to, and one that goes by the adage of “if it ain't broke don't fix it” or, in this case, “don't replace it”.

In the USA it would appear, though lots of stuff gets throw out into dumpsters too, the attitude is somewhat different still. There does not seem to be so much the “keeping up with the neighbors” attitude there than it is in Britain and we have found that ever since the 1970s like that. No wonder we are in the way that we are in this world.

© 2009