Consumer Spending Data Underplays Recession Risk

An article in Business Week, “The Coming Consumer Crunch,” had a bit of information that was news to me. The government, that is the Bureau of Labor Statistics, includes some rather large items in consumer spending that many of us would not include:

The reason is that much of what the government counts as consumer spending is not directly controlled by households. For example, the $1.7 trillion in medical costs is counted as consumer spending, but 85% of that is spent by the government and health insurers, not individuals. And $1.5 trillion in “housing services” is listed as part of consumer spending, but for homeowners it really just represents the value of living in a home rather than any spending they can change. It’s mainly a bookkeeping convention, not a real outlay.

Most of us think of consumer spending as discretionary items. Yet frrom a macro level, the way the BLS does it makes sense (although the article alludes to the fact that the imputed rent calculation is of debatable validity), but when people put on their stock jockey hats, they are likely to interpret government announcements in the context of their own experience as consumers.

How does this matter? Per above, “consumer spending” is more inclusive than most realize. So, as the article points out a change in consumer spending, based on the official definition, is going to represent a considerably larger percentage of discretionary spending that the figures imply.

Add to that the fact that there is now considerable inflation in energy prices, much of which is non-discretionary. So the impact of rising energy and food prices alone push up nominal consumer spending without there being any unit growth.

So if consumer spending is going to fall, as the story suggests, by 3%, the impact on companies that live on consumer discretionary purchases will be much worse hit. This alone explains the decline in sales at Starbucks reported earlier in the week.

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