Twin Problems: Employment and Consumer Spending September 1, 11 Asha G. Bangalore agb3@ntrs.com The elevated unemployment rate remains at the top of the Fed s worry list. Nearly as important is the recent trend of consumer spending. Bernanke s speech of September 8 included an important takeaway on consumer spending: One striking aspect of the recovery is the unusual weakness in household spending. After contracting very sharply during the recession, consumer spending expanded moderately through 1, only to decelerate in the first half of 11. The temporary factors I mentioned earlier--the rise in commodity prices, which has hurt households' purchasing power, and the disruption in manufacturing following the Japanese disaster, which reduced auto availability and hence sales--are partial explanations for this deceleration. But households are struggling with other important headwinds as well, including the persistently high level of unemployment, slow gains in wages for those who remain employed, falling house prices, and debt burdens that remain high for many, notwithstanding that households, in the aggregate, have been saving more and borrowing less. Even taking into account the many financial pressures they face, households seem exceptionally cautious. Real consumer spending posted a 3.% year-to-year increase in November 1 and has since remained positive but growing at a tepid pace. Consumer spending grew.3% from a year ago in July. In the first and second quarters of 11, consumer spending increased.1% and.%, respectively, (see Chart 1) Chart 1 Real Personal Consumption Expenditures % Change - Annual Rate SAAR, Bil.Chn.5$ Real Personal Consumption Expenditures % Change - Year to Year SAAR, Bil.Chn.5$ - - - - -6 7 8 9 Sources: Bureau of Economic Analysis /Haver Analytics 1 11-6
Historical data offer additional support to Chairman Bernanke s uneasiness about the decelerating trend of consumer spending. Chart is an index chart comparing the performance of consumer spending from the trough of a recession through the recovery/expansion phase of the business cycle. The chart limits the illustration to ten quarters following the end of a recession to keep the chart reader-friendly. In the index chart, consumer spending at the trough quarter is set equal to 1 and appropriate computations carried out for the subsequent quarters. Barring revisions of data, in the current recovery, consumer spending ranks at the bottom after eight quarters of economic growth (see Chart ) compared with its peers since 196. This poor performance is tied to soft employment conditions and balance sheet stress of households that Bernanke mentions. Consumer spending is the largest component of GDP and if the trajectory is not nudged in the right direction with suitable incentives or a sharp increase in hiring, the sub-par performance of the economy will persist. Chart Index, Trough =1 1 Real Consumer Spending 118 11 11 1961 197 1975 198 1991 1 9 16 1 98 9 9 - - 6 8 1 1 Quarters before and after trough EU Turmoil in 11 vs 1 Anything Different in Market Metrics? Greek debt issues are once again at the heart of the crisis unfolding in Euroland. The 3- month Libor hit.3% at market close today, up from.% in July and.9% in August (see Chart 3). The 3-month Libor hit a high of.5% in June 1 (see Chart 3). So, we are seeing a replay of 1 for the most part. We are also seeing something different in 11.
Chart 3.6 3-Month London Interbank Offered Rate: Based on US$ %.6.55.55.5.5.375.375.3.3.5 1 Source: British Bankers' Association /Haver Analytics France and Germany are the large economic engines of the EU. However, the important change this time around is that markets view France differently. [James Pressler, Country Risk Analyst of Northern Trust, provided Chart and 5]. The French 5-year sovereign CDS was quoted at 188.5 bps at market close today, which is higher than the pricing seen in 1. At the height of the crisis in 1, French sovereign CDS was priced at 1 bps (see Chart ). Chart 5 depicts CDS quotes for Portugal, Spain, and Italy of the problem nations in addition to Germany and France during 11. Greece is excluded in Chart 5 because the readings are significantly higher than that of the other nations. 11.5 3
Chart France -- 5-yr. CDS rates (bp) 18 16 1 1 1 8 6 Jan-1 Apr-1 Jul-1 Oct-1 Jan-11 Apr-11 Jul-11 Chart 5 Credit Default Spreads, 5-year Maturity -- Sovereigns Basis points. Daily observations. Source: Bloomberg 1 1 Portuguese Republic Republic of Italy 1 bps 8 6 Kingdom of Spain Kingdom of Belgium French Republic Federal Republic of Germany 11 Jan 11 Feb11 Mar 11 Apr 11 May 11 Jun 11 Jul 11 Aug 11 Sep
Note: CDS spread equates to the annual amount (in basis points) a protection buyer must pay the protection seller over the life of the contract. Daily pricing, at New York market close, is provided by Bloomberg (CBGN). 5