Hey, Big Spenders

Sept. 7, 2007 - For the last several years, personal consumption has accounted for about 70 percent of gross domestic product. This decade, Americans' preternatural ability to spend has rested on the following legs: 1) the strong housing market, which allowed people to tap into home equity; 2) cheap and plentiful credit for people at every rung of the economic ladder; and 3) job growth.

As the first two legs were sawed off earlier this year, economists argued that so long as Americans had jobs and steady incomes, they'd spend and keep the economy humming. Friday morning's disappointing employment report, which shows that the economy lost payroll jobs in July for the first time in four years, indicates that a beaver is gnawing through the last leg.

So, should we fear an impending collapse in consumer spending? Recent sales figures from retailers like Wal-Mart, J.C. Penney, Dollar General, and Sears have been less than encouraging. But the huge mass retailers may not be the best indicators of overall spending. Instead, we should probably focus on the what the rich are doing. After all, the high and mighty account for a hugely disproportionate chunk of consumer activity. As Citigroup equity strategist Tobias Levkovich noted in a recent report: "The top 20 percent of American income earners spend more in a given year than the bottom three quintiles combined. Thus, they have far more influence on economic direction." Levkovich points us to the Consumer Expenditure Survey data on quintiles, which indeed shows that in 2005, the average family in the top 20 percent spent $90,469 on consumer expenditures. The average families in the bottom three quintiles spent a combined $87,139.

And how are the rich doing? Quite well, thank you. Median income has been stagnant lo these many years, as the Census Bureau reported last month, and it is still below the level of 1999. But as David Cay Johnston reported (article purchase required) in the New York Times last month, people making more than $1 million "reaped almost 47 percent of the total income gains in 2005, compared with 2000" and "received 62 percent of the savings from the reduced tax rates on long-term capital gains and dividends that President Bush signed into law in 2003." Jonathan Chait's excellent new book, The Big Con, smartly argues that such outcomes are the intentional results of economic policies designed to redistribute income upward. (Few members of the Bush economic team will cop to the intent.)

Print this Email this Blog this  IM this