More Headwinds for Economic Growth?

September 26, 2012

On September 25, the Bureau of Labor Statistics released its final report on 2011 consumer expenditures. Although the information appears somewhat dated as we are practically entering the fourth quarter of 2012, the trends discovered in the analysis should have a material impact on GDP in the coming years, especially considering the importance of consumption to total GDP growth.

At the broadest level, consumer spending rose 3.3% in 2011 which was preceded by a 2.0% decrease in 2010. Given the importance of consumer spending to GDP, the increase does benefit the overall outlook for economic growth. However, the spending increase of 3.3% narrowly surpassed an increase in the prices of goods and services which grew by 3.2%. So although consumer spending has increased, an upswing in prices has blocked consumers being much better off on a net basis.

More important – and the focus of this week’s chart – is how the increased spending dovetails with consumer incomes. If income increases do not move in at least lockstep with consumption increases, consumers will be squeezed at the margin and therefore spend a greater proportion of their incomes. As a way of investigating this, the chart above depicts the income before taxes and average annual expenditure per individual consumer over the last three years. The important relationship to note is the income level percentage change. Incomes increased only 1.93% year over year, while the expenditures rose 3.3%. When incomes are exceeded by expenses, it will be hard for the consumer to sustain this pattern without taking on debt of some kind.

The trend in the graph above – expenditures growing faster than incomes – is a cause for concern. Incomes are not increasing substantially, expenses are increasing, and consumer debt levels have increased year over year. Consumers will not be able to sustain this level of spending without greater incomes or increased debt. Unless this trend can be reversed, this is another reason to expect sub-par economic growth over the next few years.

Source: Bureau of Labor Statistics, Federal Reserve