Real disposable income, consumer purchasing power after taxes and inflation, has been essentially steady since the beginning of 2007, with brief bumps and dips as the various rounds of rebate checks have been mailed to households.  Purchasing power fell at nearly a 3% annual pace in August and September after the latest round of rebate checks was exhausted.  Purchasing power will fall further in the next few months in the absence of new rebate checks.

Just as important the composition of consumer income has changed.  Aggregate wages have declined 5% and have almost fully replaced by an increase in federal transfer payments.  This includes the various rounds of rebate checks plus more people receiving unemployment benefits, extended unemployment benefits and subsidies for COBRA insurance payments.  While just as spendable as wages, this temporary source of income inhibits consumers from making major purchases on credit, especially new homes.

Household net worth at the end of 2009 is approximately 10% below the peak level at the end of 2007.  Hard data is only available through June but home price and equity market indexes suggest that half of the 21% drop in household net worth in the three quarters to winter 2009 has been recovered by the end of the year.  There has been a small contribution from firming home prices but most of the wealth recovery has been in stock market prices which soared 60% from last winter to mid-November. Consumers typically spend about 5% of their increase in net worth. But this is over a period of a year or more and only when they believe that the increased wealth is permanent.  Most of the positive wealth impact on consumer spending is ahead in 2010. This will be a major source of modest but progressive growth in consumer spending next year.

One of the consequences of slack consumer spending is that October retail sales at building materials dealers dropped 2.4%, the seventh decline in the last eight months. The cumulative decline has been 15% over the last year. This decline is a major contributor to the 17% drop in construction materials production over the last year. The small pickup expected in consumer spending in the n ext quarter, including retail construction materials purchases, will also be a major contributor to the initial recovery expected in construction materials production during the winter.

 

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11/26/2009 - posted by Maiden X

11/26/2009 - posted by Maiden X

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