Last week on my blog I took an in-depth look at the four sub-parts of GDP -- personal consumption expenditures, gross private domestic investment, exports and government spending. The point of this was to try and get an idea for what part of the economy will lead us out of the recession. In the following articles, I will highlight all of the various components of GDP to shed some light on how we get out of this mess.
Personal consumption expenditures (PCEs) comprise about 70% of US GDP, therefore making them the most important GDP component. Unfortunately, the US consumer is not doing very well right now.
First unemployment is currently at 8.5%. In addition, the median duration of unemployment is increasing:
This indicates that once someone loses a job it is incredibly difficult to find a job. This is because the country is still losing jobs at an incredible fast pace. Here is a year over year rate of change in establishment job growth:
The bottom line is the US is still shedding jobs at an alarming rate. While employment is a lagging economic indicator, it does not feel that way at the individual level. In other words, so long as people are concerned about their job expect spending to be depressed.
Consider these three other data points.
1.) Total household debt outstanding is almost as must as total US GDP.
2.) The non-current rate on residential (1-4 family) properties continues to increase (from the FDIC)::
3.) The rate of credit card delinquencies is increasing and is approaching all time highs (see the gray lines not the red line) (from the FDIC)::
And there are other reasons for this drop in spending. Consider that US households have lost 20% of their net worth since the 2Q07. As a result, we've seen a spike in the personal savings rate:
More money going into savings means less money for purchasing things. The current chart of personal consumption expenditures bears this out. Here is a chart of the year over year percentage change in real personal consumption expenditures
Notice this is the lowest year over year reading in over 50 years.
The bottom line is the US consumer is still under considerable stress. He is nervous about losing his job. Those that are unemployed are having a difficult time finding new work. This is leading to a continuing increase in residential and credit card loan delinquencies. And the household balance sheet is still in terrible shape. Net assets have dropped 20% since 2Q07. This has increased the personal savings which has lead to the lowest year over year reading in the percentage change in personal consumption expenditures in over 50 year.
Given all of these negatives, I don't see how the US consumer can be the primary driving force of an economic recovery anytime soon.