Consumer Spending Biggest Drop Since 9/11

Another non-shocker in economic news. Consumer spending is off by a substantial amount.

WASHINGTON (AP) — As the financial crisis was gaining force, Americans cut back on their spending in October by the largest amount since the 2001 terrorist attacks.

The Commerce Department reported Wednesday that consumer spending plunged by 1 percent last month, even worse than the 0.9 percent decline that had been expected. Personal incomes were up 0.3 percent last month, slightly better than the 0.1 percent gain analysts had expected.

A significant drop in consumer spending along with a modest, but better than expected, gain in personal incomes suggests that consumer confidence is also off and that people will continue to damp down spending as we head into the final holiday season and quarter of 2008. I’m thinking this does not bode well for this last quarters GDP numbers.

The big decline in spending in October underscored concerns that the economy is falling into a deep recession. Consumer spending accounts for two-thirds of total economic activity.

In other words, that kind of a drop is bad news for the economy. A one time stimulus package is unlikely to have any significant effect as well. Throwing a possible tax increase on top of it is probably not a good idea either.

Of course part of the decline can be blamed on falling gasoline prices, which is actually a good thing.

Many economists believe the current recession will last through the middle of next year and will be the most severe downturn since the 1981-82 slump.

Part of the fall in spending reflected declines in gasoline and other energy prices, which had been soaring earlier in the year. Adjusting for price changes, spending fell by 0.5 percent and it was the fifth consecutive decline, the longest stretch of spending declines since 1990-91, when the country was in a recession.

Still a downward trend is bad news. It is simply a matter of time, in my opinion, before the National Bureau of Economics Research announces that the country is in a recession. What remains to be seen is for how long have we been in a recession.

FILED UNDER: Economics and Business,
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. Dave Schuler says:

    As I wrote in my post on the economy (and the incipient economic stimulus plan) this morning, our economy has a structural problem: we’re too dependent on consumer spending. Moves to prop up consumer spending just delay the necessary restructuring.

  2. odograph says:

    I don’t like fiscal stimulus as a standard strategy. It is certainly not sane in times of expansion and surplus. It is probably not even that good an idea in mild recession. Those can probably work themselves out.

    … but is there some line, to deeper recession or desperate times?

    This Bloomberg report opens:

    Nov. 14 (Bloomberg) — A two-day summit on the global economic crisis begins today in Washington with world leaders likely to agree on little more than trying to spend their way out of a global recession.

    The Group of 20 heads of state are divided on what needs to be done after that. European leaders want greater state controls over financial markets. President George W. Bush, who hosts a dinner at the White House tonight, takes a narrower view.

    and continues:

    Practically everyone agrees on the need for massive fiscal stimulus,” said Julian Jessop, chief international economist at Capital Economics Ltd. in London. “Agreement on reform of the global financial architecture will clearly be much harder.

    Who are these people? Are they right? (Are they first year economics students?)

  3. Steve Verdon says:

    Moves to prop up consumer spending just delay the necessary restructuring.

    And I think the same thing about our financial system and the bailouts. It is delaying the pain hoping for a miracle…but miracles never happen.

    Ododgraph,

    Suppose you have been in a bad car accident and you are losing blood. Lots of it. So the doctor says you need a transfusion, but unfortunately you are the only donor. But not to worry he is going to take blood from your legs and inject it into your torso and save you. Sound like good medicine?

    Who are these people? Are they right? (Are they first year economics students?)

    No, they are scared. And when people are scared they do things they normally wouldn’t. Its called panicking.

    Oh and I know you think you are being cute and all with the “first year economics students” stuff, but it just highlights your ignorance. Did you know, that for decades, economists working in macro-economics completely ignored everything they learned in their first, second, third, and fourth year of undergraduate economics as well as their first year of graduate school when it came to microeconomics? Do you know how many macro-economists thought money illusion was a sound basis for fiscal policy? Even really smart people can sometimes forget the fundamentals.

  4. odograph says:

    What if 20 global doctors told me I needed an operation and some guy on a blog said “don’t worry, only first year medical students suggest that”.

    Seriously, when you use the “students” gag you are setting yourself up as a higher authority than … us here?. But it isn’t about us here.

    You need better chops than Larry Summers.

  5. Steve Verdon says:

    So in other words you got nothing other than an argument from authority.

    Fail.

  6. odograph says:

    You argue from authority, but when called on your authority you reject anyone else’s? What an ego!

    I’m reminded of The Princess Bride:

    Vizzini: I can’t compete with you physically, and you’re no match for my brains.
    Westley: You’re that smart?
    Vizzini: Let me put it this way. Have you ever heard of Plato, Aristotle, Socrates?
    Westley: Yes.
    Vizzini: Morons.

  7. Steve Verdon says:

    You argue from authority, but when called on your authority you reject anyone else’s? What an ego!

    I provided my explanation for why I think fiscal stimulus wont work. WTFAYTA?

    Here it is agian in short form.

    Fiscal stimulus is often limited due to crowding out. Further, most stimulus packages are miniscule compared to the size of the U.S. economy. The overall benefit is likely to be small as a result.

    Your response: Larry Summers has better chops.

    Nevermind he is now a mouthpiece for a politician who has ever incentive to lie and say that he’ll solve our economic problem. Of course, previous presidents facing economic problems couldn’t like George H. W. Bush, Jimmy Carter, Herbert Hoover.

  8. odograph says:

    Here’s the problem:

    Fiscal stimulus is often limited due to crowding out. Further, most stimulus packages are miniscule compared to the size of the U.S. economy. The overall benefit is likely to be small as a result.

    That could be reduced to an equation, right? It could show which factors were greater, the beneficial effects of stimulus or the adverse effects of crowding.

    You assert that the crowding is the larger factor, but how do you actually prove that?

    Certainly to return to my first comment (in one of these threads) the answer will probably vary with the health of the underlying economy.

  9. odograph says:

    BTW Steve, it almost sounds like you are arguing the universal, that stimulus never works, even in “dire” circumstance.

    If that is your suggestion maybe there is a body of work that proves it, and we can go read it.

    This would be a service to man of us, because the idea that government must be the spender of last resort, in extremis, is well entrenched.

  10. Steve Verdon says:

    Odograph,

    Well now I’m not guilty of making an argument from authority. I guess this is the best I’ll get from you.

    As for the equation for the multiplier there is no factor for crowding out. The model it is derived from doesn’t have that aspect of the economy built into it.

    You can find the various multipliers on wikipedia.

  11. odograph says:

    You missed my meaning. Until you lay out your internal math it is an argument from authority:

    That could be reduced to an equation, right? It could show which factors were greater, the beneficial effects of stimulus or the adverse effects of crowding.

    You assert that the crowding is the larger factor, but how do you actually prove that?

  12. odograph says:

    (Surely “wikipedia” does not show all stimulus ineffectual.)

  13. Steve Verdon says:

    Odograph,

    This isn’t a freaking referreed journal. Fire up google and start looking. You’ll likely find Mark Thoma’s entry on crowding out where Krugman lays out the case for 100% crowding out if the Fed targets stabilizing output.

    So stop being an asshat.

    (Surely “wikipedia” does not show all stimulus ineffectual.)

    I didn’t write that and really…stop being an asshat.

  14. odograph says:

    Geez, you make a naked assertion:

    A one time stimulus package is unlikely to have any significant effect as well. Throwing a possible tax increase on top of it is probably not a good idea either.

    I’m an asshat for asking you why you claim that, as the G20 economists claim the opposite?

    I should look it up on wikipedia?

    Is that what the G20 economists should do too?

  15. odograph says:

    BTW, I know it is pedantic for me to ask why you believe one way and the G20 believe another … but isn’t that what this is all about for the voter? For the citizen?

    We’ve got dueling economists asserting, some of them show their internal logic, but a lot of them do not. A lot of them are running on mental models they came to believe over time.

    … and yet it matters. We have to choose between the “We need a gazillion dollar stimulus” folks, and those who say “No, we don’t.”

  16. Steve Verdon says:

    I’m an asshat for asking you why you claim that, as the G20 economists claim the opposite?

    I keep telling you why. Crowding out reduces the effectiveness of fiscal policy. Crowding, is where intereste rates go up as the government borrows more. This explanation, but in reverse was one of the explanations for the sustained economic growth during the Clinton era…at least offered up by many of the same economists you are relying on today.

    Do you not see any sort of hypocrisy?

    It isn’t my job to make sure you are fully and completely informed/educated. That is your responsibility. Crowding out, combined with the small size of most stimulus packages means it will do very little in terms of stimulating the eocnomy. The only exception that I’m aware of is the liquidity trap and it is far from clear we are in one, or have ever been in one (some might claim 1930ish or so was a liquidity trap).

    Might there be a way to do it that produces desirable results? Yes, but I don’t think we have a system in place that can do this. It would require considerable amounts of information and the ability to act very quickly.

    And finally, if it were the case that the government really can move economic growth up and down at a whim like these economist/politicians you like to cite claim, we should just go full command-and-control economy. They obviously know how to make the economy grow at a good clip.

    Nevermind that fiscal policy has had little impact over the decades. Nevermind that polticians have lost due to poor economic conditions (Carter, Bush, Hoover, arguably McCain). If stimulating the economy is so simple and easy, why did the above happen?

    It happened because stimulating the economy is not easy. It is not simple. The economy is huge and complex, and when you implement a policy the people and other entities in that economy change their behavior either exacerbating or mitigating whatever policy is put in place. These people, the politicians you are constantly referencing–and yes they are politicians since they work for politicians–don’t really know what they are doing. Nobody really does. They are scared and desperate and they have power and they are trying to save themselves. Maybe they will, but they might very well drag us down with them. Seriously, you should read about Herbert Hoover. He was nowhere near the free market type many like to claim he is. He was a progressive reformer…arguably not too dissimilar from Barack Obama.

    Oh and no, I’m not doing this for the voter or the citizen. I’m merely posting about how I see things. Yes it is based on years of studying economics. But once again, this is a freaking blog, not some referreed journal where I’m going to post the results of a macro-simulation of the U.S. economy.

  17. odograph says:

    Oh and no, I’m not doing this for the voter or the citizen. I’m merely posting about how I see things. Yes it is based on years of studying economics. But once again, this is a freaking blog, not some referreed journal where I’m going to post the results of a macro-simulation of the U.S. economy.

    Well alrighty then. Pontification is fine, in that context.