The Slow Death of Consumption

The Rentier Class known as Wall Street likes to gauge how the economy is humming along based on the purchase of goods by the general populous. The problem is how they measure such purchases. Using their measure, everything is just hunky-dory. But a closer look reveals a much darker trend; the slow, agonizing death of Aggregate Demand.

The Keynesian idea of Aggregate Demand works something like this: If everyone has a job, then everyone can make money to buy stuff, which leads to more jobs, which leads to more people buying stuff. So the first question to ask is: are people buying stuff? And if not, do they actually have the money to buy stuff?

We know that the labor force participation rate is only 58% – meaning that only 58% of the working population actually has a job that pays subsistence wages (i.e. not marginally employed). The jobs part is understood.

If people don’t have jobs, then the only other way that they can buy stuff is with credit – usually revolving credit. The amount of revolving credit to most people have never regained their pre-recession levels, even with $1.4 Trillion given in bank bailouts to do just that:

Credit

So people don’t have money to buy stuff. We can confirm this with accurate measures of Aggregate Demand – or consumption.

Wall Street measures Aggregate Demand in 2 categories: durable goods (refrigerators, washing machines, cars, etc), and non-durable goods (household items, clothes, etc). The problem is that they use a raw index (or chained dollar amount) without adjusting for inflation. They ask: “How much was spent on consumption?” Their charts end up looking like this:

PCE Indexed

That actually looks pretty good! Especially for the durable goods market that tends to be higher priced items. But it’s misleading.

Here’s the better question to ask when the average person is wanting to know if the economy will ever recover for people who are not a part of the Rentier Class on Wall Street: are people spending more now than they did a year ago; or even 3 months ago? When we look at that in the present, we get a very different picture:

PCE percent change

Why is there such a disparity? Because of low inflation. The Fed target for inflation has been 2% since 2009. However, inflation is only at 1.4% currently. And the difference in indexed PCE per quarter is only 1.04%. Meaning that the only reason it SEEMS like people are spending more on consumption is only because of inflation. The difference is not really adjusted for inflation, but rather asks: “are people spending more now than in the past?” The answer becomes: “Not really.” The statistical difference between Point B and Point A just happens to be less than 1.4%, and falls within the “inflation window.”

And the trendline is for durable goods (more expensive stuff)– which makes the picture even bleaker.

While people will always need to buy household items, and thus will always be aggregate demand to some degree, it is suffering a slow, agonizing death. GDP will catch up. And Wall Street will never know what hit them because of their denial. Then maybe, just maybe, the actual market will reflect the actual condition of the economy.

 

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