Consumer Spending Jumps in September over August – Why That Is Not Good News

Hint:  Where is the Money Coming From?




 

Except for partisan driven ideologues no serious economic analyst doubts that economic activity is demand driven and that in the U. S. and Europe this means consumer spending.  And in September consumer spending increased .6% over August, which is more than 7% annualized.  Since consumer spending drives an economy, this should be good news, and indeed it was reflected somewhat in third quarter GDP growth of 2.5%, a big increase over the 2^nd quarter.

So why don’t serious economists like The Dismal Political Economist start to celebrate?  Because of this number.

Consumers earned only 0.1 percent last month. And after adjusting for inflation, their after-tax incomes fell 0.1 percent last month — the third straight monthly decline.

There was one bright sign in all of this, wage and salary income increased substantially

But the decline was largely because of a 1.4 percent drop in interest income last month, the third sharp monthly drop. Wages and salaries increased 0.3 percent in September.

which points out another problem with monetary policy that produces very low interest rates.  Interest expense to one party is interest income to another party.  Cutting interest rates to stimulate spending is partly offset by the lower income received by lenders and private persons who have interest earning investments.

So how does spending increase without an increase in income?  Easy, consumers either dip into savings, or borrow money.  The problem is that neither of these two things are sustainable, in fact, it was in large part that consumers could no longer tap savings or borrow money to finance increases in spending that caused The Great Recession.

So what is needed to sustain and grow the modest momentum in the current economy?  Consumer income must be growing.  And the growth must take place in the low and middle income areas.  They are the ones whose consumption will drive an economic recovery, if they have the income to do so.  Government policy right now is focused on cutting spending, and that spending is income to somebody, and reducing employment.  How is that going to help?