Don't count consumers out in recovery

Those who were not expecting consumers to play much of a role in the recovery have been pleasantly surprised by recent bullish reports from the stores and malls. Retail sales have increased every month this year, and headline writers have brought back the "surge" word to describe the 1.6 percent gains in March, the largest since last November. Meanwhile, personal spending has gone up in nine out of the last 10 months, as the savings rate has retreated below 4 percent.

Those who were not expecting consumers to play much of a role in the recovery have been pleasantly surprised by recent bullish reports from the stores and malls. Retail sales have increased every month this year, and headline writers have brought back the "surge" word to describe the 1.6 percent gains in March, the largest since last November. Meanwhile, personal spending has gone up in nine out of the last 10 months, as the savings rate has retreated below 4 percent.

While the recession was worsening, analysts pondered whether mounting economic hardships would have lasting effects on consumer behavior. And even as the economy began to turn around in the summer of 2009, observers cautioned that it was unlikely that consumers could be counted on to provide much of a boost because of high unemployment rates, foreclosures, and excessive levels of debt.

Consumer Spending Share of GDP Remains Consistent

But rather than diminishing in importance, consumer expenditures as a share of GDP were relatively stable in 2009 versus 2007, when the recession began. Comparing fourth quarter data on consumer expenditures for the two years, consumer spending increased to 70.8 percent in 2009 Q4, up slightly from 69.9 percent share in 2007 Q4 (see table).

Indeed, consumer spending as a share of GDP has consistently bounced around the 70 percent level, up or down a few tenths, for more than a decade, in or out of recession.

A scan of the shares of other components of GDP in the table shows the impact of the recession on business investment, with cyclical decreases in the shares of nonresidential structures, equipment and software, and a continuation of the reduction in outlays on residential housing. (Residential housing's share of GDP peaked in 2005 Q4 at 6.2 percent and is now less than half that amount.). Within the relatively consistent figures for consumer spending as a percent of GDP lie two persistent trends.

One is the decrease in the importance of spending on goods and the second trend is the continuing growth in outlays on services. Services, which incidentally now account for 85 percent of all jobs, accounted for 47.7 percent of GDP in 2009 Q4, up from 45.8 percent in 2007 Q4.

The changing importance of goods and services in consumer expenditures are shown over time in the second table. Spending on goods accounted for 30.9 percent of GDP in 1969 and had fallen to 23.1 percent by 2009 as services grew in importance.

Although the issue of the magnitude of government spending has attracted much attention in recent months, government's share of national output today is not much different from 20 years ago, and is reduced from 1969.

Forecast for 2010 Q1 turns brighter

The advance report on first quarter growth of GDP will be released by the U.S. Bureau of Economic Analysis on April 30. It now seems likely that consumer spending will be up by 3 percent, for the first such quarterly increase of this magnitude since 2007 Q1. First quarter real GDP is expected to grow by 3 percent as well.

Negatives in the forecast for Q1 include not only an expected decline in nonresidential structures of 10 percent, but also yet another decrease in outlays for new residential building. For all of 2010, the current macro outlook calls for GDP growth of 3 percent, double-digit growth in equipment and software spending and exports, and zero growth contributed by state and local governments.