Silver Linings?

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.

4 thoughts on “Silver Linings?

  1. Not to sound like a “dud,” I saw a preview of a few of those infrastructure programs: new playground and tennis courts, swimming pools, a Museuem of the West in Flagstaff, AZ etc. Not your typical citizens concept of an infrastructure project!

    This followed by the fact that many states and local governments are cancelling current capital programs in anticipation of now getting the funding from the Feds. So how much will actually be new infrastructure projects as opposed to a defunct project simply being revived?

    This followed by the fact that many infrastructure programs take many years before the full dollar of investment actually gets spent.

    This followed by the fact that Obama has included municipal aid and social welfare programs like universal health care for children to the tune of $60B per annum as part of the “stimulus.” Trust me. It will be $160B when all is said and done. Didn’t Hawaii try this program and had to cancel because even the citizens who had health insurance coverage for their children cancelled that coverage and put their kids on the government dole? DUH! What did the Hawaii’ governemnt expect. We have trained the citizens to demand their fair share and act surprised when they take it!

    I think you will see a samller percentage of the stimulus acually spent on NEW infrastructure than we all actually now anticipate.

    Remember, your Representatives just love pork for their New Year’s feast. And feast they will. That’s a promise.

    Merry Christmas

  2. Potential silver linings? – although painful, the global recession, with the right leadership, can be a platform driving postive change in a variety of areas including 1- the necessity to learn how to live with less and be more frugal, thereby reducing our negative impact on the environment; 2- leaders accepting the need to work cooperatively and globally to solve economic, financial and environmental challenges with a sense of balance, equity and partnership vs competition…..wishful thinking perhaps….

  3. thaddeus,
    Excellent point. One of the biggest problem with the Japanese stimulus plans in the 1990’s were that only about a third of it represented new spending. A similar thing is happening in Europe now. I suspect that the advertised numbers for the U.S. stimulus will end up being far larger than what actually ends up as new spending. Just another reason to be more worried about deflation than inflation.

  4. James,
    I believe you are selling short the productive “infrastructure” of the internet that the boom of the 1990s brought. While the boom of the 2000s brought mostly far-flung suburbs and the attendant traffic, the 90s turned in the greatest information technology upgrade since the dawn of the telephone.

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