U.S. June Consumer Spending Up 0.1%, Inflation Slows

From Bloomberg.

The 0.1 percent rise in spending reported by the Commerce Department today, which matched economists’ estimates, followed a 0.6 percent gain in May. The personal consumption expenditures index – a price measure closely watched by the Federal Reserve – also rose 0.1 percent, excluding food and energy.

Back at that macroeconomic equation:

Aggregate Demand = Consumption + Investment + Government Expenditure + Net Exports

Consumption is, though, rather more than just a part of national expenditure and income:

So increasing exports and government expenditure are all well and good, but as consumption and investment expenditure go, so goes the country.

Looking at the flatting consumer spending, on top of the flattening investment spending: the UK, which has its own run with adjustable-rate mortgages, is facing an upward trend in repayment costs, and attempts at refinancing – and the effects on consumption. The UK also has more debt-financed consumption than anyone else, so they’re facing, potentially, a bigger hit than the US (where, I believe, debt-financed consumption is used more for house-improvement/expansion than, say, holidays and mobile phones). Nevertheless, you borrow USD1tr or so annually – and need that much to keep pace at all.

The principle however remains, given that it is basic macroeconomics. Higher housing costs means less disposable income, which means less consumption. Higher interest rates means the same. Higher inflation means less real-valued income and wealth, equalling less consumption. US inflation has slowed, but it is still real (and remember, one ignores fuel and food at their peril).

As for what comes next, I prefer the famous words of Bill Murray’s Steve Zissou, where he tells Angelica Houston’s Eleanor Zissou that he is right on the edge; he doesn’t know what will come next. Marketwatch’s Paul Farell (found on the Big Picture), though, has a few ideas:

1. War/military defense budget busting
2. Real estate bubble raging
3. Foreign trade imbalance, trillions new debt
4. China’s economy overheating
5. Private-equity credit imploding*
6. ‘Homeland Insecurity’ failures*
7. Hedge funds hurting retirement plans
8. Oil rocketing toward $100 a barrel*
9. Weak U.S. dollar keeps sinking*
10. Federal budget deficits
11. Social Security entitlements
12. Medicare’s massive deficits
13. Health-care-insurance deficit
14. Climate change fuels global wars*
15. Personal savings shortfall
16. Consumer debt surging*
17. Corporate pension defaults
18. Local government pension deficits
19. International credibility deficit*
20. Washington politics in endless gridlock

Asterisks show those that the Big Picture considers prime – and I agree, although I don’t know about the climate change/global wars one: mostly because I think it’s hard to tell what will happen with climate change and what conflicts will ensue. Conflict between Israel, Turkey, etc. and their downstream neighbours? How about France, Netherlands, Belgium and Germany as rising sea levels take out half of the land of the first three, pushing them into their Eastern border? North America against South America, over dwindling food? China and Japan, over gas?

Farell’s discussion of these, point by point, it worth 5 minutes of your time. I particularly liked his characterisation of US consumers as “We spend like teen drug addicts with stolen credit cards.”