Monday, March 29, 2010

Consumer Resilience Continues

Proponents of the “New Normal” have counted on a higher savings rate and less consumer spending as the economy slowly deleverages in the wake of elevated debt levels, structural damage to the financial system, higher taxes, and more regulatory hurdles on the way. So far the New Normal has not materialized, and consumer spending went up again this month when looked at on a year-over-year basis (see chart below).

The fact that the New Normal hasn’t materialized yet doesn’t mean that the thesis is incorrect, but as I wrote about last May on this very blog (, the mistake may have been in applying a secular concept on a cyclical time horizon. If anything, over the last few quarters we’ve seen a big healing in credit conditions, a contraction in savings rates, improving confidence, and yes, even renewed spending on the part of consumers. What the economy still needs is job growth, which would improve wages, reinforce the ability to keep spending, and bolster top line earnings even further. The next clue on that front comes this Friday with the monthly employment report. We’ll be watching…