Keith likes to remind us that everything that matters in macro happens on the margin –and that being good at what we do means being vigilant for signs of change and that, while we invest in the present we must keep an eye on the horizon at all times. The horizon for US consumer spending looks bleak based on multiple overlapping demographic factors.
In the charts below I have illustrated two potentially peaking long-term drivers for consumer spending. In the first chart, we see the age breakout of the work force estimated by the Department of Labor. The imprint of the baby boom is clearly seen, cresting in successive peaks roughly a decade apart.
The second chart shows the long term view of US consumer leverage. The Federal Reserve reported Tuesday that consumer credit declined in July by a larger-than-anticipated $21.6 billion from June, the most on records dating to 1943. In the midst of the great recession it’s clear that consumers are accessing fewer loans (whether by design or because of reluctant lenders) and spending less.
Taken in unison, the two illustrations indicate an easy to understand trend for the coming years: the number of people in the US labor force who are at optimal earning age has peaked and will be steadily decreasing while, simultaneously, consumer credit is declining. If you combine this long tails data with the points we hammered on in our unemployment post on Wednesday (“Stagflation: Where the Pain is”) in which we discussed how current unemployment trends were being felt most heavily by the oldest and youngest components of the work force, the picture becomes increasingly grim. Not only are there fewer young people entering the work force, they are having difficulty finding employment and when laid off are taking much longer to find new positions.
As Todd Jordan pointed out in a recent post on gaming industry trends, prior to the consumer downturn beginning in the fall 2008 personal consumption expenditures were on a steep twenty-year incline. With consumer spending accounting for roughly 70% of GDP the implication is clear: the higher one goes, the more pertinent gravity becomes and keeping rates at zero or buying clunkers can only delay the inevitable. Gravity always wins.