What’s Causing U.S. Personal Spending to Drop: Job Losses, Fear or Both?

BY Paul Solman  December 13, 2010 at 2:28 PM EDT

Paul Solman answers questions from NewsHour viewers and site visitors on business and economic news most days on his Making Sen$e page. Here’s Monday’s query:

Name: Michael Cassady

Making Sense

Question: Paul, If the U.S. consumer market is the economic driver of the U.S. economy, and that of China too, with middle-class incomes stagnant, and consumer debt more controlled following the housing market bubble, how many jobs can be exported before it impacts U.S. consumption seriously?

Paul Solman: I’m assuming you mean “how many jobs can be lost?” not necessarily “exported.” But either way, the answer would seem to be that U.S. consumption has already been impacted seriously. In a recent story, we explored the notion that workers are afraid to strike or press for higher wages due to the glut of unemployed people sitting in the wings and willing to work for less.

That same dynamic would seem to be prompting many Americans to save more, spend less. (The personal savings rate is up near 6 percent, after having bottomed out at about 0 percent a few years ago, though the holiday numbers aren’t in yet, and spending is said to be brisk.)

There’s no way to know if decreased spending is a function of job loss or fear. Both, presumably.

But in a consumption-driven economy, the data are sobering. According to the Bureau of Labor Statistics, “personal consumption expenditures” rose at an annual rate of 3 percent from 1988 to 2008, but are expected to grow at 2.5 percent in the decade that ends in 2018. A half-percent decline might not seem like much, but look at it like this: a drop from 3 to 2.5 is actually a decline of 16.7 percent (.5 as a percentage of 3) or one-sixth in simple fractions.

There’s a debate, sparked by the very knowledgeable economics journalist Michael Mandel, about how much of GDP is actually “personal consumption.” The usual number is 70 percent. Mandel says that if you take away government transfers, like Medicare spending, the number is closer to 40 percent.

But even at only 40 percent of GDP, that’s close to $6 trillion. If you cut $6 trillion by one-sixth, that’s a $1 trillion loss: a 6-7 percent decline in economic activity, year-to-year.

As Mandel himself wrote a few months ago:

Consumer spending today is lower than it was at the beginning of the recession, outside of education, healthcare and housing. What’s more, the growth rate has been on a steady downward trend.

What does this all mean? Just as the government-supported health and education sectors have been the main source of new jobs since 2000, so has health and education (and housing) been the main support for consumer spending.

Paul Krugman sums up in his Monday New York Times column:

What we’ve been dealing with…is a painful process of “deleveraging”: highly indebted Americans not only can’t spend the way they used to, they’re having to pay down the debts they ran up in the bubble years. This would be fine if someone else were taking up the slack. But what’s actually happening is that some people are spending much less while nobody is spending more — and this translates into a depressed economy and high unemployment.

This entry is cross-posted on the Making Sen$e page, where Paul Solman answers your economic and business questions _Follow Paul on Twitter._