Consumer spending edges up in July, incomes flat

In the July 28, 2009 article "Consumer spending edges up in July, incomes flat," Associated Press economics writer Martin Crutsinger reports that the signs of potential economic recovery are mixed:

WASHINGTON – Consumer spending edged up in July with help from the popular Cash for Clunkers program, but household incomes, the fuel for future spending increases, were flat.

Consumer spending is the big question mark as the economy struggles to emerge from the recession. Economists worry that households hurt by rising unemployment, weak income growth and depleted investments will not provide the support the economy needs to rebound to sustained growth.

The Commerce Department said Friday that consumer spending rose 0.2 percent in July, matching economists' expectations. Personal incomes were unchanged last month, a weaker showing than the expected 0.2 percent gain.

With incomes flat in July as spending rose, the personal savings rate dipped slightly to 4.2 percent from 4.5 percent in June. The savings rate was 2.6 percent a year ago.

Economists expect the savings rate to rise in coming months to around 6 percent as workers try to rebuild depleted nest eggs. The process of rebuilding savings is one of the factors expected to depress consumer spending and weaken the broader recovery.

The modest rise in spending last month followed a 0.6 percent jump in June, a gain driven by a surge in gasoline prices. Adjusting for inflation, spending rose 0.2 percent in July, and 0.1 percent in June.

The slight rise in spending reflected a 1.3 percent jump in purchases of durable goods such as cars, a gain propelled by the clunkers program that started at the end of July. Purchases of nondurable goods such as clothing actually fell 0.3 percent last month.

The unchanged reading for personal incomes followed large swings in the previous two months that reflected payments to individuals from the government's $787 billion economic stimulus program. Those payments pushed incomes up 1.4 percent in May and their absence in June caused incomes to fall 1.1 percent.

Incomes have taken a beating during the recession as employers slashed payrolls and forced workers to take unpaid days off to hold down wage costs. In addition, households with sufficient income to hit the shopping malls have trimmed their purchases and boosted savings to cope with a severe financial crisis which sent the stock market into a nosedive last year.

The concern is that consumer spending, which accounts for 70 percent of economic activity, may not be strong enough to propel a sustained recovery from the longest recession since World War II.

The Federal Reserve has pushed a key interest rate to a record low near zero in an effort to boost the economy and is pledging to keep rates low for a considerable period even as the economy begins to grow again.

The Fed is able to make that pledge because inflation is not a problem. A price gauge tied to consumer spending was unchanged in July after a 0.5 percent jump in June that had reflected a big rise in energy prices. Excluding food and energy, the price gauge showed a 0.1 percent rise, and over the past year increased 1.4 percent, well within the Fed's comfort zone for inflation.

The government reported Thursday that the overall economy, as measured by the gross domestic product, fell at an annual rate of 1 percent in the April-June quarter. It marked the fourth consecutive decline in GDP, the longest stretch on records that go back more than six decades.

Many economists believe GDP in the current July-September quarter will rebound to growth above 3 percent and remain at that level in the fourth quarter. The economic growth likely will reflect a boost from the highly successful clunkers program to boost car sales and other government stimulus efforts.

But the fear is that economic growth will slip back in the early part of 2010 as the impact of the government programs fade and unemployment rises. The 9.4 percent jobless rate in July is expected to edge up to 9.5 percent in August and keep rising until it tops 10 percent. That will be a tough environment to see strong gains in consumer spending.

Some analysts worry that the country could be headed for a double-dip recession in which the economy resumes growing for a brief period only to fall back into a downturn.

The troubles consumers face have meant tough times for the nation's retailers. A survey of big retail chains showed that shoppers remained tightfisted in July, a development that raised worries about back-to-school sales and the holiday shopping season later this year.

In July, mall-based apparel stores fared the worst with Macy's Inc. and teen retailers Abercrombie & Fitch Co. and Wet Seal Inc. reporting disappointing results.

However, apparel discounters like Ross Stores Inc. and TJX Cos. both reported sales gains that exceeded Wall Street estimates. TJX operates the T.J. Maxx and Marshalls chains.

Cash for Clunkers Trade-In Program Tunes Up Economic Engine

According to Justin Lahart's August 4, 2009 article "Trade-In Program Tunes Up Economic Engine" in the Wall Street Journal:

Of the nearly $800 billion of stimulus funds, the $1 billion "Cash for Clunkers" program may offer the most bang for the buck in terms of jump-starting the economy.

The program comes as auto dealers' inventories are running lower, after the bankruptcy-related shutdowns at General Motors Co. and Chrysler LLC.

Car companies may need to raise production as a result, and to do that, they will have to boost their own depleted stockpiles of raw materials and parts.

The prospect has some economists scrambling to raise their forecasts for growth in the second half of the year.

The (confused) economics of cash for clunkers

According to Justin Fox in his August 4, 2009 article "The (confused) economics of cash for clunkers" in TIME magazine:

It all began a year ago with a suggestion from a prominent economist. Wrote Princeton University's Alan Blinder in the July 27, 2008 New York Times:

Economists and members of Congress are now on the prowl for new ways to stimulate spending in our dreary economy. Here's my humble suggestion: “Cash for Clunkers,” the best stimulus idea you've never heard of.

Now, of course, cash for clunkers is a spectacularly successful—and controversial—reality. The rebate program that rewards people for turning in older gas hogs and replacing them with more efficient new cars has run through its $1 billion in funding in a matter of weeks. The House voted 316-109 Friday to expend another $2 billion on the program. In the Senate it's looking to be more of a battle. The most interesting debate about Cash for Clunkers, though, may be the one among economists.

Blinder, a respected former Federal Reserve vice chairman and member of President Clinton's Council of Economic Advisers, pitched cash for clunkers as a program to stimulate the economy in a way that was both environmentally friendly (because it got polluting, gas-guzzling cars off the road) and helped the poor (because low-income Americans tend to be stuck with the least-efficient cars). The idea of cash for clunkers wasn't new—such programs have existed at the state level ever since the Clean Air Act amendments of 1990 encouraged states to pursue market-based approaches to improve air quality. What was new about Blinder's pitch was its combining of environmental objectives with Keynesian economic ones.

Now that cash for clunkers is reality, can we say that it has achieved those objectives? Well, as so often with economic matters, the answer seems to be, it depends.

* Stimulus. By all accounts the program has driven a rush to car dealers. Auto sales in July were at their highest pace in 11 months. In an e-mail to clients Monday, Credit Suisse economist Neal Soss revised his economic growth forecast for the third quarter from 1.3% to 2.0%, and for the fourth quarter from 2.0% to 2.5%—all on the basis of cash for clunkers' success. Of course, to believe this you have to believe the Keynesian story that deficit spending by the government actually can stimulate the economy. There's a rearguard of conservative economists who think that such spending has little impact, but their arguments haven't been very convincing lately (Justin Lahart has a nice summing-up of the debate in the WSJ today). There are other economic concerns about cash for clunkers, though. It distorts incentives, which over time can lead to all sorts of weird side effects (economist Steven Levitt suggested, back when Blinder first proposed the idea, that "one of the most visible responses to this program" might be "a new market for mechanics fixing up cars that don't run at all just enough so that they can be driven to the government's lot to collect the cash,"1 and commenters to this blog offered a several caveats of their own when I floated the idea last fall). Also some economists caution that the boost in economic growth brought by junking older cars and replacing them with new ones may be mostly chimerical—since the lost value of the junked old cars isn't reflected in economic statistics. Still, seen strictly as a means of getting money temporarily flowing into a particularly stricken part of the economy, cash for clunkers does seem to be working spectacularly well. For whatever that's worth.

* Environment. Cash for clunkers programs arose in the U.S. and Europe in the 1990s as environmental measures intended to get the most polluting cars off the road. The two main assessments I've been able to find of their effectiveness, a 1992 study (pdf) by the late and lamented Office of Technology Assessment (OTA) of an early cash-for-clunkers pilot program in Southern California and a 1999 report by the European Conference of Ministers of Transport (ECMT), both came down on the positive side, but only barely. The design of the program was deemed crucial. The initial California program was aimed only at pre-1971 vehicles, which made it very effective because those cars predated modern emissions standards and concerns about fuel economy—they were truly clunkers. Schemes to scrap cars that were less old and decrepit, the OTA said, would deliver less bang for the buck. The ECMT, meanwhile, concluded that "cash-for-scrappage" programs (where you just turn in your old car and get a check) could be cost effective ways of reducing emissions but that "cash-for-replacement" programs (the payment for scrappage is contingent upon buying a new car) generally were not—in part because stimulating the production of new cars meant increasing emissions from manufacturing. The current U.S. cash for clunkers program is (a) not targeted only at older vehicles (vehicles more than 25 years old aren't even eligible) and is (b) a cash-for-replacement scheme. So it probably can't stand on its own as a positive environmental step, even though the gas mileage of the new vehicles purchased so far has been encouragingly high. There is, however, an intriguing international complication: In a new paper, economists Lucas Davis and Matthew Kahn describe how the North American Free Trade agreement has enabled big-time exports of used cars from the U.S. to Mexico. This export flow has improved the gas mileage and emission standards of the Mexican automotive fleet—but because it has enabled Mexicans to keep driving cars that in the U.S. would have been scrapped, Davis and Kahn estimate that it has increased overall emissions. A cash for clunkers program would slow the export flow to Mexico, thus reducing at least that particular source of auto emissions (while also depriving some Mexicans of cars, of course).

* Income distribution. A cash-for-scrappage program—which is what Blinder was suggesting a year ago—could potentially be a boon to poor people who could replace their clunkers with less-polluting and more fuel-efficient but still cheap used cars. In the interest of boosting the beleaguered auto industry, the current cash for clunkers program requires that those who turn in old cars buy brand-new ones. No help for the poor there.

In short, the economic verdict is ... complicated. But what did you expect?

Update: Now I've gotten Alan Blinder's (brief) take on how things are panning out:

"I always thought that cash for clunkers would be an effective stimulus, but it seems to have exceeded expectations. It would be a shame to cut it off here. The original bill was way under-budgeted.

That said, I wasn't happy with the design details, which pay too little attention to environmental concerns."

1. bryanfromhouston points out in the comments that Levitt's concern doesn't apply to the cash for clunkers bill that Congress actually passed, which requires those who trade their clunkers in to have had them insured for at least a year.

Consumer spending rises in June, incomes drop

According to the August 4, 2009 article "Consumer spending rises in June, incomes drop" by Associated Press economics writer Christopher S. Rugaber:

WASHINGTON – Consumers opened their wallets and pocketbooks a bit more in June, increasing their spending for the second straight month while saving less, even as incomes fell sharply.

Consumer spending is closely watched because it accounts for about 70 percent of total economic activity. Many economists warned that despite the slight increase in June, falling wages and rising unemployment likely will keep spending sluggish for the rest of this year.

Still, the housing market continued to show signs of life as pending U.S. home sales rose in June for the fifth straight month, according to the National Association of Realtors. The group's pending home sales index rose more than expected to 94.6, from an upwardly revised reading of 91.3 in May. The last time there were five straight monthly gains was July 2003.

The Commerce Department said Tuesday that consumers boosted their spending 0.4 percent in June, slightly ahead of analysts' estimates. That comes after spending rose 0.1 percent in May.

Personal income fell 1.3 percent, the steepest drop in more than four years. Incomes rose by the same amount in May, boosted by one-time payments from the government. Economists expected personal incomes, the fuel for future spending, to fall 1 percent.

Incomes benefited in May from a one-time payment of $250 that was mailed to 50 million Americans receiving Social Security and other government benefits, as part of the Obama administration's $787 billion stimulus package.

Excluding the impact of the stimulus, personal income would have fallen 0.1 percent in June after a flat reading in May, the department said.

Wages and salaries fell 0.4 percent in June from May, the eighth straight monthly drop. That makes it unlikely consumers will ratchet up their spending anytime soon, economists said.

"The U.S. consumer will not be much of a help during the early stages of the economic recovery," Joshua Shapiro, chief U.S. economist at consulting firm MFR Inc., wrote in a note to clients.

Amid the longest recession since World War II, the personal savings rate has surged as Americans seek to rebuild their nest eggs after home values and stock portfolios plummeted last year. While saving can be good in the long run, rapid increases in saving can slow the economy.

The department said the personal savings rate fell to 4.6 percent in June, after jumping to 6.2 percent in May, which was the highest since February 1995. The rate dropped as low as 1 percent last year.

Spending may increase in July and August due to the government's "cash for clunkers" program, which has spurred thousands of Americans to trade in old cars for newer vehicles, Shapiro said. But the savings rate is likely to keep rising later this year.

Investors appeared unfazed by the economic report and focused on locking in some profits after a 14 percent climb in stocks since July 13. The Dow Jones industrial average lost about 15 points in morning trading, and broader indices also dipped.

The department also revised its spending and income data back to 1929, as it did last week when it reported second-quarter gross domestic product, the broadest measure of the economy's output. The changes show that Americans saved slightly more than previously thought.

For example, the department revised the savings rate in 2008 to 2.7 percent from 1.8 percent.

The government reported last week that the overall economy, as measured by the GDP, shrank at an annual rate of 1 percent in the second quarter, far less severe than the 6.4 percent decline in the first quarter and a 5.4 percent decline in the fourth quarter of 2008.

Sluggish consumer spending has held back the sales of food and beverage companies. Tyson Foods Inc., the world's largest meat producer, said Monday that sales fell 3 percent in its third quarter. The company posted a strong profit due to cost cuts.

And sales for MillerCoors, the U.S. joint venture owned by Molson Coors Brewing Co. and SABMiller, increased by only 1 percent in the most recent quarter, Molson Coors reported Monday.

Cash for Clunkers program improves gas mileage

According to the August 3, 2009 article "Administration: 'Clunkers' improving gas mileage" by Associated Press writer Ken Thomas:

WASHINGTON – The Obama administration appealed to the Senate on Monday to bail out the cash for clunkers rebate program, arguing it has already made striking gains in fuel efficiency and is a "wildly popular" economic boost.
Transportation Secretary Ray LaHood ducked when asked if the program will be suspended if the Senate does not vote to replenish coffers before lawmakers go on vacation later this week. Instead, he said "I believe the Senate will pass it this week."
The administration said the average fuel economy of new vehicles purchased through the program is nearly 10 miles per gallon higher than for the vehicles traded in for scrap. LaHood said some 80 percent of the traded-in vehicles are pickups or SUVs, meaning many gas-guzzlers are being taken off the road, and the Ford Focus is a leading replacement vehicle.

"The program is working the way Congress intended it to work," he asserted on MSNBC. But it was not intended to run out of money nearly so quickly, nor create such confusion at dealerships.

The administration pressed hard for an additional $2 billion after serving notice over the weekend that the program could expire as early as this week unless the Senate acts, as the House did in voting overwhelmingly for the money Friday.
Senate Republicans appeared to be in no rush Monday. "We were told this program would last for several months," GOP leader Mitch McConnell of Kentucky said in remarks prepared for a Senate floor speech. "It ran out of money in a week, prompting the House to rush a $2 billion extension before anybody even had time to figure out what happened to the first billion."
McConnell said "it's not a bad idea to look for a second opinion. All the more so if they say they're in a hurry."

The administration collected information on 80,500 vehicle transactions logged into the government's operating system through Saturday afternoon. An official said the fuel efficiency improvements would save a typical customer $700 to $1,000 a year in fuel costs. The new vehicles were getting 25.4 miles per gallon on average, a 61 percent increase over the models traded in, said the official, speaking on condition on anonymity because the figures had not been released.

The data was aimed at appeasing lawmakers such as Sens. Dianne Feinstein, D-Calif., and Susan Collins, R-Maine, who have questioned whether the program's environmental benefits go far enough.

"We're encouraging senators to listen to their car dealers and the people they represent," LaHood said. "If they do that, it will pass the Senate."

The administration has been coy about just how long dealers would be reimbursed for rebates of up to $4,500 per vehicle, after saying Sunday that the program would have to be suspended if the Senate failed to act.

Fierce lobbying for the program came from other quarters: The National Automobile Dealers Association and the American International Automobile Dealers contacted thousands of dealerships, telling them to bombard the Senate with phone calls and e-mails.

"This is the one true stimulus that seems to be working out of all the things that have been tried in the last few months," said Cody Lusk, president of the international group.

LaHood had said earlier that if the $2 billion isn't approved, "we would have to suspend the program." At the same time, LaHood told C-SPAN's "Newsmakers" show Sunday that the administration would "continue the program until we see what the Senate does and I believe the Senate will pass this."

"Any deal that is made (Monday) or the next day and that is in the pipeline ... the dealer will be reimbursed and the car buyer will be reimbursed," the secretary declared.

The program provides consumers with $3,500 or $4,500 in incentives for trading in gas guzzlers for more fuel efficient vehicles. Automakers were reporting July's auto sales on Monday and analysts expected the car program to provide a boost in overall sales.

Only the Senate can help at this point; the House voted Friday for the money to be put into the popular program, and the House members have left on their summer recess. The Senate is scheduled to start its vacation by week's end.

Obama officials scrambled last week to add money to the Car Allowance Rebate System, which is designed to get old, polluting vehicles off the road and scrapped while helping car dealers emerge from the recession. The $1 billion has led to the sale of some 250,000 new vehicles.

The program helped lift Ford Motor Co. to its first monthly sales increase in two years, the company's top sales analyst said Sunday.

July sales results mark the first year-over-year gain for Ford since November 2007 and apparently the first uptick by any of the six biggest carmakers in a year, George Pipas said.

"We were having a good month — and Ford's been having some good months lately — but the program really put us over the top for sure," Pipas said.

The Senate narrowly approved the initial money in June. But some lawmakers who voted for the plan, including Feinstein and Collins, have said the additional dollars should push consumers to buy more fuel-efficient vehicles and allow people to buy fuel-efficient used vehicles. Sen. Jeff Bingaman, D-N.M., has said he was concerned with the way the House paid for the extension, shifting $2 billion from a renewable energy loan program.

Cash From Clunkers

The commentary "Cash From Clunkers" in the August 2, 2009 Wall Street Journal ridicules the cash for clunkers program by saying "Let’s have a $4,500 subsidy for everything."

The author does not understand basic economics. If the goal is to increase employment (and thus incomes, output, and economic growth), then it actually does make sense to increase purchases of newly produced goods and services - even if they are millions of pink plastic flamingos.

And there are numerous benefits of destroying an existing product and replacing it with something better. For example, the replacement of single paned windows with energy efficient ones can result in lower energy costs to the homeowner. And replacing a gas guzzling car with a fuel efficient auto can save the owner fuel and maintenance expenses. (By the author's logic, a dilapidated building should never be torn down and replaced.)

According to the WSJ article:

Americans are streaming back into auto showrooms, and one reason is the “cash for clunkers” subsidy. Democrats are naturally claiming this is a great success, while Republicans are claiming that because the program has run out of clunker cash so quickly, this proves government can’t run the health-care system. How do we elect these people? What the clunker policy really proves is that Americans aren’t stupid and will let some other taxpayer buy them a free lunch if given the chance.

The buying spree is good for the car companies, if only for the short term and for certain car models. It’s good, too, for folks who’ve been sitting on an older car or truck but weren’t sure they had the cash to trade it in for something new. Now they get a taxpayer subsidy of up to $4,500, which on some models can be 25% of the purchase price. It’s hardly surprising that Peter is willing to use a donation from his neighbor Paul, midwifed by Uncle Sugar, to class up his driveway.

On the other hand, this is crackpot economics. The subsidy won’t add to net national wealth, since it merely transfers money to one taxpayer’s pocket from someone else’s, and merely pays that taxpayer to destroy a perfectly serviceable asset in return for something he might have bought anyway. By this logic, everyone should burn the sofa and dining room set and refurnish the homestead every couple of years.

It isn’t clear this will even lead to more auto production over time, since the clunker cash may simply cause buyers to move their purchases forward. GDP will get a fillip in the third and perhaps fourth quarters, which will please the Obama Administration. But the test will be if auto sales hold up next year and into the future once the clunker checks go away. The debate over the subsidy may even have prolonged this year’s auto slump as buyers delayed their purchases waiting for the free lunch.

All of Washington professes to be surprised that the $1 billion allocated to the subsidy has been used up so quickly, but giving away money is one thing government knows how to do. The Clunkers who are in Congress are now patting themselves on the back for their great success, and the House quickly voted to pass out another $2 billion in clunker coupons. With a $1.8 trillion budget deficit, who’s going to notice this pocket change?

Clearly, we spoilsports need an attitude adjustment to Washington’s new economics. And since money is no object, let’s give everyone a $4,500 voucher for other consumer goods. Let’s have taxpayers subsidize the purchase of kitchen appliances, women’s clothing, the latest Big Bertha driver—our Taylor-made is certainly a clunker—and new fishing boats. These are hardly less deserving of subsidies than cars, and as long as everyone thinks we can conjure wealth out of $4,500 giveaways, let’s go all the way.