JACKSON HOLE, Wyo. -- The following sentiment, uttered by a chief investment something on television this morning, had your narrator shouting above the din of his
Consumers are living on borrowed time. A host of special factors has recently allowed them to spend beyond their means. But now that those factors have run their course, the spending-income relationship is bound to return to normal. Consumption cannot continue to outpace income forever.
There are two things to note here.
The first is a peculiar (yet understandable) special-factor asymmetry exhibited by those who peddle shares for a living and economists alike. Namely, when the disappearance of special factors stands to help a slowdown forecast and prevent the
from raising rates, then those factors are meaningful. They are real; they are important.
Conversely, when the disappearance of special factors stands to push up the broader price measures, say, then those factors are ignored. They are not real, and not only are they not real now, but they were also never real to begin with. Ask any New Era type if the very kind price measures we've seen over the past few years have anything to do with special factors like unusually low commodity prices, and you'll be shown the door. (And, owing to the productivity boom, it'll slam twice as quickly.)
The second problem is that the word "forever" carries as much weight in an economic sense as it does in a relationship sense.
The table above shows a 70-year history of real (inflation-adjusted)
personal consumption expenditure
and real (inflation-adjusted) disposable (aftertax)
. (These numbers are available at the
site. The consumption numbers are in spreadsheet format in NIPA Table 1.2. Click
here for the income series; it's the one all the way to the right.)
It will surprise many people to learn that the tendency for consumption to outpace income did not begin last year or the year before or even the year before that. It began nearly 20 years ago. Consumption has increased faster than income (on average) during each of the past two decades. There have been 17 years since 1980 during which consumption and income both rose. (Both fell in 1991, and consumption fell 0.3% in 1980.) Consumption has risen faster than income during 12 of them.
More than a little strange, then, that most forecasters are still surprised that it keeps happening.
The point here is not to argue that consumption can outpace income -- here comes that F-word again -- forever. It cannot. One day, share prices -- and household net worth -- will quit rising. One day, houses will stop appreciating. One day, the job market will quit tightening. One day, credit-card delinquency rates will soar; one day, total debt burdens will do the same.
The point is that none of that is happening yet -- and that no one knows exactly when it will.
And so we stand at a fork in the road. Down one path lie economists boldly predicting an end to a years-long trend. Down the other lie economists like the ones at
Salomon Smith Barney
, who say:
As in recent years when special factors such as refunds and mild weather were used to explain "temporary" spending strength, solid fundamentals may carry the consumer long after those effects subside. Today, the backlog of wealth effects remains large enough to assure that spending will continue to outpace income all year unless financial incentives change radically.