Consumption — What a difference a month makes

Today’s big news is an unexpected surge in consumer spending in July. After adjusting for inflation, the increase is 0.5%, which is the largest since 2009. It comes after three straight months of decreases in real consumer spending and a historically dismal reading for consumer confidence a few weeks ago.


Granted, the recent plunge in consumer confidence could translate into an immediate about-face in consumer spending, but for now the picture looks quite different. Much of the collapse in confidence was due to the debt-ceiling fiasco and dashed hopes for a budget deal, but memories of that episode may fade, at least as far as their impact on consumer behavior; after all, Congressional dysfunction is nothing new.

The July increases for personal income (0.3%) and consumption (0.8%) pull the year-to-year monthly increases up to 5.3% and 5.1% (in nominal terms). Subtracting the 2.8% inflation over the same period, the real increases are 2.5% and 2.3%.(Source: Bloomberg.com; sorry, no Permalink available.) Still not enough to lead a rapid recovery, as 3% real GDP growth is the norm and at least 4% would be needed to reduce unemployment, but not bad. Dean Baker has noted that consumption is actually fairly high, in the sense that the household savings rate is low by postwar standards. So it appears that consumers are spending, they just don’t have a lot of income to spend.

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