Some “What-ifs” for Consumer Spending

The excerpts below are from a short article written by the folks at Northern Trust, discusses possible changes in consumer spending if the consumer can only rely on disposable personal income (DPI). In light of my on-going posts about the possibilities of a recession due to lower consumer spending it is worth a read.

No Worry about Consumer Spending So Long As Jobs/Income Are Growing? That’s the rallying cry of the economic bulls. Aside from the fact that jobs and personal income are coincident indicators, not leading indicators, and that labor compensation as a percent of consumer spending tends to rise just before the onset of recessions, will jobs and income growth alone be enough to sustain real consumption growth going forward? That is, with mortgage equity withdrawals drying up and corporate buybacks and private equity buyouts slowing down, suppose that consumer spending relative to disposable income reverts to its mean. What rate of growth in real consumer spending could we look forward to in 2007?

There is little doubt, in my mind anyway, that the higher ratio of consumer spending relative to disposable personal income has been the result of increased household borrowing using residential real estate as collateral and the sale of household direct and indirect holdings of corporate equities to corporations and private equity syndicates. If households had to depend only on their income from employment and other sources to fund their consumer spending, we would observe much slower growth in consumption expenditures. So, those who keep harping that “the consumer” will be just fine so long as there is job and income growth ought to do some “what ifs.”