Death of the Consumer and Other Miracles

Something peculiar is going on.  One data point says the economy’s improving.  Another says it’s floundering.

Nonetheless, we strive to connect the dots and draw inferences as we go.  For example, according to data released Tuesday, manufacturing and construction spending is on the rise…

“Stronger-than-expected data on U.S. manufacturing and construction spending on Tuesday hinted the world’s biggest economy was gaining traction,” reported Reuters.

“The U.S. manufacturing sector grew last month at its fastest pace in more than two years, with the Institute for Supply Management’s (ISM) index of national factory activity rising to 55.7 in August from 55.4 the prior month.

“That comfortably beat expectations for 54, with the index at its highest since June 2011.

“A reading above 50 indicates expansion in the sector.”

What’s not to like about that?

Consumers Demur

The economy’s been dragging about for so long we’ll take any positive growth signal we can get.  We’ll also delight in yesterday’s ISM report that the U.S. service sector increased in August at its fastest pace in eight years.  Maybe things finally are turning around.

But before we clock out for the day and go fishing we must first contemplate another data point that was served up last Friday.  This one came courtesy of the Commerce Department.

Evidently, when their number crunchers counted up the beans for July, they discovered consumers had demurred.  Spending hardly increased.  What’s more, the little it did increase was cancelled out by inflation.

Specifically, consumer spending rose 0.1 percent in July.  Yet when you subtract out inflation, spending was flat.  What does this tell us?

It tells us, if you believe the government’s CPI reading, inflation is practically nonexistent.  Of course, we all know latent inflation is like dry Malibu Canyon brush in search of a spark…it could conflagrate at any moment.  When that happens, inflation will push modest consumer spending increases back to negative.

It also tells us that, at least for now, consumption won’t lead the economy to recovery.  Popular academic thought considers this a bad thing.  They base this notion on the fact that consumption accounts for nearly 70 percent of economic activity.  If people aren’t buying stuff, they say, the economy sinks.  In fact, as Milton Friedman taught them, they believe a little inflation helps keep consumers spending and the economy humming.

Death of the Consumer and Other Miracles

Still, we don’t buy it.  Our thick skull isn’t as accepting of murky thought as Friedman’s must have been.  If something’s not perfectly lucid we can’t grasp it.

For instance, we don’t consider debt based growth from a consumer credit card binge a good thing.  Sure it shows up as increased growth in the GDP numbers.  But it’s phony growth that’s not attributed to real wealth creation.

It’s the result of borrowing capital from the future and burning it up today.  Naturally, juicing up the standard of living today is the expedient.  But ultimately it subtracts value from tomorrow.

Savings and investment of private capital are what’s really needed to lay a granite foundation that real economic growth can be built upon.  Unfortunately, savings and investment takes discipline, shrewd acumen, and risk.  They also take time.  So, too, creating value takes hard work…and over half the population disparages hard work.

When it comes down to it, the Federal Reserve and the Treasury have traded the discipline of true economic growth based on savings and capital investment for bubble based asset price increases and credit based consumption.  Rather than encourage savings and investment, they strive to boost the economy by ruining the dollar.  It’s what they were trained to do.

Happily, for now, the consumer is dead.  They’ve thrown in the towel and are refusing to buy more stuff on bank credit.  Perhaps manufacturing and construction spending will provide the severely needed growth engine for the economy.  At the very least, it will generate some production.  Moreover, if this continues, we may finally experience real economic growth rather than bubble based asset price increases.

Considering all the damage the Federal Reserve has done over the years, just the prospect of real economic growth is an absolute miracle.  When it eventually arrives it will be unrecognizable.


MN Gordon
for Economic Prism

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