Keep your eye on consumption

The Fed bailout got all the news this weekend, as it should. But don’t forget the weak job report from Friday. The combination of employment woes, falling house prices, and the credit crunch means that we are about to move into the steep downleg of the consumption bust.

I’m in agreement here with Nouriel Roubini, who writes:

It is by now clear that the shopped-out, saving-less and debt-burdened US consumer is on the ropes and that there will be a significant and persistent contraction of real consumption for the next few quarters. About a dozen separate negative headwinds – to be described in detail in this note - are now hitting the US consumer while the positive effects on consumption of the tax rebates are already fading away.

That rebate boost was supposed to stimulate consumption until august of this year instead after a recovery of retail sales, real personal spending and consumption in April and May real retail sales and real personal consumption spending have fallen already in June and July. So consumers stopped consuming in spite of the tax rebates instead of spending such rebates (so far only 30% of them have been spent). This suggests that real consumption will certainly fall in Q3 and will continue to fall for a while into the middle of 2009. Real consumption did not fall in the 2001 recession and you have to go back to the 1990-91 recession to see a single quarter of negative consumption growth.