3 Things: Explaining The Consumption-Disfunction

Stop Blaming Consumers, They Can’t Help It

Since 2009, mainstream economists, the media, and the Fed have continued to prognosticate a resurgence of economic growth. Yet each year, as shown in the chart of Fed forecasts below, such predictions have repeatedly overstated reality.

Since the economy is almost 2/3rds driven by consumption, it was only a function of time before these same individuals, consistently wrong, lash out at those directly responsible for their shortcomings – the consumer. As noted by Robert Samuelson via The Washington Post:

“American consumers aren’t what they used to be — and that helps explain the plodding economic recovery. It gets no respect despite creating 14 million jobs and lasting almost seven years. The great gripe is that economic growth has been held to about 2 percent a year, well below historical standards. This sluggishness reflects a profound psychological transformation of American shoppers, who have dampened their consumption spending, affecting about two-thirds of the economy. To be blunt: We have sobered up.”

While Robert is correct about consumers not being what they used to be, he is wrong about the reasoning why.

Yes, the economy has created 14 million jobs since the last recession but it has not been the economic nirvana that such a number would seemingly reflect. This is because the majority of the jobs created have been in lower wage-paying industries which has suppressed overall wage growth which is lower today than it was in 2000. Furthermore, while 14 million jobs have been created, the working-age population has grown by 17 million. 

Of course, the problem becomes more apparent when you realize that 1-in-5 families have ZERO members employed. In other words, it is not a lack of a desire to consume but an inability to do so.

This problem is exacerbated by the lack of wage growth since the turn of the century. As shown in the chart below, the 2-year average of median incomes in the United States, as reported by the Census Bureau, has fallen since the turn of the century and is now only slightly higher than it was in 1995.