Consumer spending is the engine of the US economy. 70% of GDP is attributable to consumers using their earnings to buy goods and services. Strong consumer spending propped-up growth in the 4th Quarter of 2011 and 1st Quarter of 2012. Even as earnings growth stalled, consumers dipped further into savings to keep buying, as their expectations of economic growth were optimistic. Those days are over.
The Commerce Department reported today that consumer spending, adjusted for inflation, dipped 0.1% in June. (Of course, the downturn was “unexpected” as economists expected a 0.1% rise in spending.) It’s the biggest drop since August last year, and reverses the gains in May, when spending nudged up 0.1%. It is also the third straight month in which retail sales have fallen.
Interestingly, this pull-back came in the midst of modest income growth, 0.5% from May. The anemic 1st Quarter growth was fueled by consumers dipping into savings, clearly anticipating a brighter economic future. In June, consumers banked their earnings, lifting the savings rate to 4.4%, the highest level in a year. It’s as if the entire economy, even down to the consumer, has “gone Galt.”
The media is trying to report that consumer spending was “flat” in June, which isn’t remotely true. Consumer spending fell. Today’s report suggests more bad economic news ahead. The media may be ignoring the bad economic news, but consumers–and voters–are feeling it every day.
The American consumer is channeling The Who and “won’t be fooled again.” The economy’s only hope is a change of direction in Washington.