Consumers are Continuing to Spend But Not Contribute to Real Economic Growth

In the past, increasing unemployment and inflation have usually been the key factors in slowing consumer spending leading to downturns in the economy.  But to this point, the economy has been hurt by a combination of housing and financial sector difficulties.  In the months ahead, job losses may once again assume their more prominent recessionary role, but for now inflation will take the lead.  

The Labor Department last Thursday reported that the Consumer Price Index (for all urban consumers) rose by another 0.8 percent in July, twice the 0.4 percent increase economists expected.  The July increase marked the third consecutive month of inflationary gains following increases in May and June of 0.6 percent and 1.1 percent respectively.

Overall, the rise in consumer prices had inflation increasing by 5.6 percent in the past 12 months, the largest yearly rise since January 1991.

Such increases in the cost of goods and services have continued to pressure consumers; confidence in the economy remains weak, while households struggle to deal with record food and fuel bills.    
 
Such pressures were clearly displayed within the Discover U.S. Spending Monitor, a monthly survey that gauges the economic confidence and spending intentions of 15,000 consumers. The monitor remained flat for July, rising only 0.1 points to 86.1 for the month.  Overall, the monitor has declined more than 11 percent since July of last year and nearly 14 percent since its inception in May of 2007.

Another gauge of consumer sentiment, the Consumer Confidence Index (CCI), remained flat as well, with a moderate increase of 0.9 points, to end July at 51.9 points.  Overall, the CCI is down nearly 54 percent from its mark of 111.9 points in July of last year.     

Even with fuel prices experiencing a slight decline at the end of July, many consumers indicted that monthly household spending would likely increase next month.  According to the Discover monitor, 83 percent of consumers expected to spend as much or more in August as they did in July, driven by increasing household expenses.

As a result, though consumers continued to cut discretionary spending from their monthly budgets – with more than 69 percent of respondents to Discover indicating cut backs to entertainment expenses and 62 percent having changed vacation plans – overall spending has continued unabated.  Price inflation can be singled out as one of the most prominent factors contributing to overall spending increase.

Inflationary pressure was a key factor in driving up credit card related debt.  According to the Federal Reserves report on consumer credit – known as the G.19 – both May and June, months that saw higher than expected consumer price increases, also witnessed revolving credit rebound from its 0.3 percent expansion in April.  May saw revolving credit recover and rise at an annual rate of 7.6 percent, while June saw revolving debt expand at 6.8 percent.  With July’s continued consumer price increases and related card spending, this trend will continue.

Dimitri Michaud analyzes trends in strategic receivables management within the consumer finance sector, including the banking, credit card and mortgage markets. He conducts research, writes publications and hosts a regular blog on insideARM.com for Kaulkin Media.