Analytical Wealth

Some thoughts on the consumer spending reports of recent months, inflation and the stimulus checks.

Back in May the story was that the stimulus checks were a resounding success and responsible for an alleged surge in retail spending. If you recall I disagreed with this sentiment because the numbers just didn't add up, and I felt that the increase in retail spending in May was merely measuring energy and food inflation, more than it indicated a significant increase in consumer spending on a YoY basis. In short I felt that the stimulus checks weren't a big factor, and that the so called surge was really just a function of inflation as opposed to increased consumption.

The theory that May's consumer spending "surge" was really just a measure of inflation was supported by the following data points on inflation:

The Consumer Price Index increased by 0.6% last month and was up 4.2% on a YoY basis.

Gasoline Prices rose 5.2% compared to April and were up 21% on a YoY basis

Food Prices rose 5% on a YoY basis

Import prices rose by 2.3% in May, 17.8% on a YoY basis

If you consider the rate at which prices rose the obvious conclusion is that people spent more money to finance lower levels of consumption, and we shouldn't claim a real increase in consumer spending until we see spending levels outpace the rate of inflation.

Now if the stimulus checks were indeed a big factor in retail spending we should've seen a YoY increase in June's spending, as more and more people had the opportunity to spend their stimulus monies. Instead the opposite was true as the retail numbers for June were effectively flat at 0.1%, and most individual spending categories declined YoY with the exception of food (0.7%) and fuel (4.6%). June's numbers were actually worse than advertised when you realize that the increases in food and fuel were due to inflation, and overall CPI rose rather sharply in June, meaning: even strong inflationary pressures weren't enough to goose the nominal consumer spending numbers.

The two month view seems to indicate that consumer spending is declining in real terms, and inflation is "helping" the numbers to look better than they are as people spend more money to finance lower amounts of consumption. It also appears that the stimulus checks are having minimal effect, as the YoY changes in consumer spending (especially the multi-month view) isn't markedly different from how things looked before the stimulus checks were issued.

Of course the above is merely a "hypothesis" of a probable pattern of consumer behavior based on available data, which begs the question: what would things look like if we had solid data on how people used their stimulus checks?

(From the Christian Science Monitor via Yahoo News): "University of Michigan economists Joel Slemrod and Matthew Shapiro are researching what taxpayers are doing with their checks – $600 per individual and $1,200 for couples filing jointly.

"So far, we're finding that 20 percent of the people say the rebate led them to spend more," says Dr. Slemrod, who teaches at the Stephen M. Ross School of Business. "That's about what we found for the tax rebates of 2001."

Data indicate a significant portion of the rebate checks is going into savings, Slemrod says. In May, the personal savings rate soared to 5 percent, up from 0.4 percent the month before.

"If you convert that to dollars, you see the jump in savings is about the same magnitude as the stimulus checks in May," he says."

In other words in the very month that many analysts were claiming that consumers were spending their stimulus checks en mass, most consumers were putting them into their savings accounts. You can't even make the argument that the increase in personal savings in May was the result of people depositing checks they intended to spend later, because consumer spending in June was basically flat and inflation gobbled up any YoY increase in real consumption. If consumers are pulling back on spending in response to a slowing economy and higher prices, and are electing to save instead of spend found money, it stands to reason that the retail spending slow down will be with us for some time.

The sad part is that many politicians and economists will see the fact that most consumers saved their stimulus checks as a negative, when in fact it's 100% positive as the best thing for consumers to do right now is to spend more and save less. It's disturbing that our Congress was attempting to encourage consumers to make bad financial decisions.

Sources:

The NY Times: “Oil and Food Push Consumer Prices Higher in May” – Michael M. Grynbaum, June 14, 2008.

The WSJ: “Stimulus Checks Bolster Retail Sales” – Kelly Evans, June 13, 2008

AFP (via Yahoo News): "US retail sales slow by more-than-expected in June" -- July 15, 2008.

The Christian Science Monitor (via Yahoo News):   " Economic Stimulus Part 2" -- Ron Scheer, July 21, 2008 .