Wednesday, April 7, 2010

Consumers Are Spending Again

From the NY Times:

After months of penny-pinching amid the recession, new figures — showing an improving job market, rising factory output and increased retail sales — suggest that consumers are no longer restricting their budgets to necessities like food and medicine. They are starting to buy clothes, jewelry and even cars again.

The mood has gone from panicked to cautious, and now, as Mark Zandi, chief economist for Moody’s put it, some consumers are “almost a bit giddy.”

After the financial crisis hit in late 2008, consumers retrenched heavily. And in the months that followed, there were fears that newly frugal Americans would increase their savings so much there was no hope that consumer spending could be a factor in a recovery.

That was a troubling prospect because consumers have been the drivers of economic growth after past recessions. After all, their spending accounts for more than two-thirds of all economic activity in the United States.

But just a year later, consumers have eased off a bit on their savings, which frees up cash for them to spend. And in part because of the high rate of mortgage defaults, the overall consumer debt burden has been dropping. Those trends suggest to some economists that consumers may now be in a position to help drive the recovery.

The improved outlook has been showing up at store cash registers for several months, and the trend seems to be accelerating. Major retailing chains posted better-than-expected earnings in their most recent reporting periods and are likely to deliver more good news on Thursday, when they report their March sales results.

Let's look at the data.

Real (inflation-adjusted) PCEs have been increasing since the end of 1Q09.

The largest area of PCEs -- services (which account for over 60% of PCEs) never dropped. Instead, the spending on these goods leveled off.

Spending on non-duarbale goods has been increasing since about the middle of last year.

Durable goods are the main area where consumers have pulled back on their spending.