Special Commentary

Consumers Remain Thrifty Amid Economic Turmoil

Thu, Jun 11 2009, 09:00 GMT
by Adam York , Mark Vitner - Wells Fargo Investments, LLC | View company's profile

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The combination of massive job losses, slower income growth and a colossal loss of wealth has come together to usher in a new era of consumer thrift. Consumer spending, which began moderating when housing prices started falling rapidly in 2007, lost further momentum in 2008 and then collapsed following the onset of the financial crisis late that year. Real personal consumption expenditures plunged at a 3.8 percent annual rate during the third quarter and tumbled at a 4.3 percent pace in the fourth quarter. While outlays picked up slightly during the first quarter of this year, the rebound seems mostly statistical in nature. Outlays declined in March and April, which means, even with solid gains in May and June, outlays will still likely post a modest decline for the second quarter.

Declines in consumer spending are relatively rare. Prior to the current downturn, real personal consumption expenditures declined in just seven quarters during the previous 30 years. Significant back-to-back drops are rarer still. The closest comparable period was the short but sharp downturn in 1980, which followed President Carter’s credit controls. The current situation bears some similarities with that period. Rather than some dictate from the public sector, the catalyst for the current slump was the seizing up of the secondary credit markets last fall, which caused credit to evaporate almost overnight. The lack of credit led to a sharp pullback in purchases for virtually anything that needed to be financed.

Tighter credit conditions accelerated the slowdown in consumer spending that began when home prices started falling. Sales of big-ticket items began to falter in Florida, California, Arizona and Nevada well before they did in the rest of the country. Once financing became tougher to find, sales of big ticket items declined across the country. Motor vehicle sales, which were running at a 17 million unit annual rate near the peak of the housing boom, began to slide during the second half of 2006, when home prices started to falter. Light vehicle sales slipped to 16.1 million units for all of 2007. After averaging a 14.7 million unit pace in the first half of 2008, sales plummeted to a 12.9 million unit pace in the third quarter, closed out the year at a dismal 10.3 million unit pace, and averaged just a 9.7 million unit pace in the first five months of 2009.

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Published On Thu, Jun 11 2009, 09:02 GMT

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Wells Fargo Investments, LLC

https://www.wellsfargo.com/

sam.bullard@wachovia.com

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