Could this be it? Part 2

August 22, 2013
By: Eric Lundin

If you try to keep up with all of the experts, seers, and mad scribblers who try to predict which way the economy is heading at any particular time, you’re well aware that consensus in this field is about as rare as dinosaur eggs. The reasons are many, but to simplify: some economic factors are hard to measure accurately; it’s impossible to predict future events; and even when creating one scenario or another on supposed future events, it’s difficult to predict how various events will interact (and to what degree).

Given all that, a recent blog by Dan Davis included some perspectives on the state of the 2013 economy and a few general predictions for the near future. The blog tackled quite a few issues – namely stagflation, stagnation, and the U.S. economy’s heavy reliance on one thing that probably isn’t going to come back strong anytime soon: consumer spending.

Davis isn’t the only one citing consumer spending as being the roadblock, or at least a patch of unpaved road, preventing the economy from reaching full throttle. In fact, quite a few economists would agree with this—probably enough to call it a dinosaur egg (or a consensus).

How is consumer spending restraining the economy? Let’s take a look. For decades, from the 1950s to the 1980s, consumer spending made up 60 percent of gross domestic product (GDP); since 1980 or so, it has been creeping steadily upward, and now accounts for about 68 percent of GDP. In other words, consumers have a much greater role in the economy than they once did. Throughout these decades, consumer spending on services has steadily increased. In 1950, about 40 percent of a household budget went to services; these days it’s 66 percent. Bear in mind that spending on services doesn’t change all that much throughout expansions and recessions. People don’t put an end to their phone service during a recession, and if they scale back on a few items—cutting back on television channels, going out to dinner less often—these changes aren’t nearly as drastic as putting off a big-ticket purchase, like a new freezer or a car. As the economy goes through short-term disruptions, spending on services is stable.

And this brings us around to consumer spending on goods. First, nondurable goods, items that generally last three years or less. This has fallen by half over the last six decades or so, from 44 percent of a typical budget to 22 percent. Meanwhile, spending on durable goods has fallen from 16 percent to just 11 percent. In other words, as the role of the consumer in the economy has grown, the role of manufactured goods, both durable and nondurable, has shrunk.

Focusing on the time period at hand, consumer spending on nondurable goods really hasn’t changed in more than a decade. It was 22.4 percent in 2000 and its 22.7 percent now, so nobody is expecting any growth there.

For durable goods, the outlook isn’t much better. Consumer spending on durable goods fell off a cliff from 2007 to 2009, from 12.5 percent to 10.3 percent. That doesn’t sound good at all, but it isn’t likely to rebound; it had already been falling for decades. When times were good, consumers would spend as much as 16 percent of their income on durable goods. Since 1990, they have never spent more than 14 percent on durables.

Where has the money formerly spent on durables been going? Certainly more of it has gone to services as the number of conveniences has multiplied. Some of it also has found its way overseas as spending on imports has risen.

Don’t get me wrong. Consumer spending on durable goods—domestic durable goods—has been growing. The problem is that this growth has been agonizingly slow.

The upshot is that consumer spending, the durable goods industry, and the economy as a whole aren't likely to see much action any time soon. The future of fabricating, as Davis pointed out, is likely to be steady and stable more than fast and furious.
Eric Lundin

Eric Lundin

FMA Communications Inc.
2135 Point Blvd
Elgin, IL 60123
Phone: 815-227-8262