We got one of our last batches of economic data for this calendar year today, and there may have been a glimmer of good news in there. In the news stories about the November data, I read that personal income went down, but real personal consumption went up, and the savings rate went up, which I found confusing, so I looked directly at the Bureau of Economic Analysis news release.
To summarize (all numbers are November’s change from October), personal income went down by 0.2%, and disposable personal income (after taxes) went down 0.1%, but in real terms (after adjusting for inflation, or deflation in this case), disposable personal income went up by 1.0%, which is huge (remember, that’s month over month). This was entirely due to falls in food and energy prices (mainly gasoline), since the core price deflator (excluding food and energy) was flat. Of that 1.0% increase in real disposable personal income, 0.6% turned into increased consumption, and 0.4% turned into increased saving, raising the savings rate from 2.4% to 2.8%.
What’s good about that? First, since personal consumption is most of our economy, an increase in real personal consumption – even if it is entirely due to the falling price of oil – puts a floor under how much the economy as a whole can contract. Based on the October-November data, Calculated Risk is estimating that real PCE (personal consumption expenditures) will decline “only” 2.9% this quarter, which is better than consensus forecasts.
Second, the personal consumption data were better than expected, which is what we need if we want the stock market (and consumer confidence) to start heading upward again.
Third, the increase in savings indicates that American consumers are returning to a more sustainable balance between consumption and savings. For the long-term picture, click on the chart in this Calculated Risk post. (What does it say that when I need a nice, clear chart of economic data, I turn to a blog?) Where should the savings rate be? There is no perfect answer to that question, so for now I’m going to defer it to a future post.
On the downside, this bit of good news is not sustainable, for the simple reason that oil prices have to stop falling sometime. And with oil in the $30s, that time might be right about now. So December gasoline will turn out to be cheaper than November gasoline, but we probably can’t rely on any further month-over-month improvements. Furthermore, the rest of the economic picture looks as bleak as ever, so incomes will probably continue to fall even as prices level out. The net effect could be that this quarter (Q4) will be better than forecast, but next quarter and the one after that will be worse. (If you look at the aggregated forecasts on the WSJ’s main Economy page, 2009 looks pretty optimistic.)
Looking for other things to be optimistic about, here are a few possible silver linings:
1. Food prices. The run-up in food prices earlier this year threatened hundreds of millions of people with malnutrition or starvation. These are March 2009 corn futures:
However, as James Surowiecki discussed in The New Yorker last month, we are still a long way from having a reliable food system.
2. Changes in Americans’ consumption behavior. There is a good chance that this crisis will frighten many or most people into lower debt levels and increased saving. Given that we were already headed for a potential retirement savings catastrophe before the stock market fell by 40%, this is a good thing. The big question is how to get to a new, higher-savings equilibrium without taking a big chunk out of the economy in the process. More on that later.
3. Shift away from the financial sector. Over the past two decades, the financial sector – first investment banks, then private equity, then hedge funds – has been soaking up a larger and larger proportion of our nation’s smartest, most talented, and most ambitious young people. While I am no Luddite when it comes to financial innovation, I do think we were well past the point of zero marginal returns. Even if those would-be masters of the universe go into management consulting instead, I still think our society will be better off. If all those physicists who turn into quantitative modelers stay in physics, we’ll be even further ahead.
4. Investment in productive infrastructure. One thing that amazed me about the long boom of the 1990s and 2000s was that it happened at the exact same time as a decline in the quality of our nation’s infrastructure. I was amazed every time I drove through New York – one of the most financially fortunate cities in the world for the last decade – and saw that the bridges and roads were every bit as decrepit as when I grew up there in the 1970s. Now, however, with the Obama Administration looking for things to spend money on, we will finally start investing in infrastructure.
I’m sure there are other silver linings out there, some we won’t realize for decades.