Jubak's Journal
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The consumer's bottomless wallet is an illusion
Consumer spending remains the economys salvation, because businesses still arent investing. But what happens if consumer incomes stop growing?
By Jim Jubak
Consumer debt sits at historic highs, but thanks to low interest rates, consumer payments on that debt are relatively low. So long as personal incomes keep rising, consumers should keep spending, say economists.
Thats critical, because strong consumer spending is all thats keeping this very modest economic recovery going.
And, according to government figures, personal incomes are rising. Real disposable income -- whats left for us to spend after weve paid taxes, mortgages and such -- grew in November by 0.3%. That was the fourth straight monthly increase and the most recent available data. Over the past 12 months, real disposable incomes increased 6.2%.
That let real personal consumption grow by 4.2% in the third quarter of 2002 and by 0.2% in October and 0.5% in November, even as the rate of personal savings climbed from 2.3% in 2001 to almost 4% in the first 11 months of 2002.
From the government figures, you might think personal incomes are growing fast enough to keep both spending and saving marching higher. But scratch beneath the surface of the official figures and some cracks appear.
In the 22 months since the recession officially began in March 2001, the U.S. economy has shed 1.8 million jobs. The unemployment rate is stuck at 6% and is likely to stay at that level until at least mid 2003. Meanwhile, 22% of all unemployed workers have been out of work for at least six months, according to the Labor Department.
Behind the numbers
So where has the income growth come from in this jobless recovery?
First, from the refinancing boom. Thanks to lower interest rates, the typical homeowner refinancing a 30-year mortgage has been able to lower that regular payment by an average of $200 a month. Thats a huge boost to disposable income.
Second, from the 2001 Bush tax cut that sent less money to Washington and kept more in consumers pockets.
Personal incomes cant count on the same kind of boost from these two sources in 2003. Interest rates could stay low for a while -- although many economists expect them to start climbing again in the second half of 2003 -- but stable rates wont lead to the same flood of refinancings as the sharp drop in rates produced last year. And the next tax cut on the federal level isnt set to take effect until 2004. Even if Congress does decide to accelerate that cut into 2003, rising state taxes will largely negate those cuts.
2003 will also bring other pressures on disposable income that were absent or muted in 2002. For example, companies are expected to pass on more of the cost of employee health care. That means higher payroll deductions for health insurance. As individuals compensate for skimpier employer contributions to 401(k) retirement plans, that will push up the savings rate farther.
None of this means that consumers suddenly are about to stop spending or that the economy is headed straight for the dreaded double dip.
But without some real growth in employment or business investment, it is hard to see how consumer spending alone can produce better than very modest 2.5% economic growth in 2003.
Editor's Note: A new Jubaks Journal is posted every Tuesday, Wednesday and Friday. The Wednesday edition stems from Jim's appearance on CNBCs Business Center most Wednesday nights at approximately 5:45 p.m. ET. Selected CNBC stories can be found in the TV Reports index.
At the time of publication, Jim Jubak owned or controlled shares in none of the equities mentioned in this column. He does not own short positions in any stock mentioned in this column.
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