Disposable dollars determine spending - consumer spending is slow to recover from 1990-1991 recession

American Demographics, June, 1997 by Elia Kacapyr

When is a recovery not a recovery? When consumers' spendable income doesn't grow as fast as other economic indicators.

The recovery and expansion since the 1990-91 recession has been unique in several respects. Employment did not roar back as briskly as it does after most recessions. Labor productivity has grown modestly, but wage rates are stagnant. Inflation is at relatively low levels, even after more than five years of expansion. Recently, some analysts have been wondering where consumers have been hiding during this whole episode.

Consumer spending can propel the economy to create jobs and income gains that engender even more employment and income. Consumer spending is the largest component of the economy, overshadowing business, government, and foreign expenditures combined. Two-thirds of all spending comes from the consumer sector. Most of this goes for consumer services as opposed to tangible products.

The two economic expansions in the 1950s are often cited as examples of consumer-led recoveries. After the Korean War in the early 1950s, U.S. consumers binged on automobiles, driving the economy forward. In the two-year expansion between 1958 and 1960, household spending on nondurable goods and services provided the impetus for growth.

During the long economic recovery of the 1980s, it was not unusual for consumer spending to grow 4 or 5 percent a year. Since the 1990-91 recession, however, consumer spending has grown only 2 or 3 percent a year. The penny-pinching is perplexing. After all, the economy has been in the recovery stage for more than five years. Consumer sentiment, as measured by various polls, is soaring to all-time highs. And the stock market advanced at a fast pace in 1995 and 1996. Now that people's brokerage accounts have swelled significantly, why won't they spend more on goods and services?

The answer to this puzzle lies in a book published during the darkest economic days of this century. In 1936, John Maynard Keynes wrote: "For whilst other factors are capable of varyingaggregate income is, as a rule, the principle variable upon which consumptionwill depend." Keynes further cautioned that the income he was referring to was adjusted for inflation and net of taxes. Today, economists call this "real disposable income."

A quick check indicates that the growth rate of this crucial factor has slowed in tandem with consumer spending. Between 1984 and 1989, the average annual change in real disposable income in the U.S. was $137 billion. Over the same time period, real consumer expenditures also grew $137 billion per year. Between 1992 and 1996, real disposable income grew an average of $117 billion per year. Concurrently, real consumer spending grew $114 billion per year. So, despite great gains in wealth and the stock market and despite lower interest rates and soaring consumer confidence, consumer spending has been lackluster.

Disposable income is a component of the American Demographics Index of Well-Being. In the first month of 1997, per-capita real disposable income fell along with the employment rate. This combined to lower the income and employment sector of the Index a tad. The social and physical environment was also on the down side.

On the up side, the productivity and technology sector benefitted from a reduction in hours worked, while industrial production held steady. The decline in hours worked translated into gains in the leisure sector. Consumer attitudes continued to forge ahead, rising 1.9 percent. These ups and downs resulted in a slight gain in the American Demographics Index of Well-Being in January 1997, to 102.67. This means that the typical American was 2.7 percent better off at the beginning of the year than in April 1990.