Wednesday, July 29, 2009

The coming squeeze on consumption: we ain’t seen nothin’ yet

Consumption spending has nowhere to go but down.


Average C/GDP is 64.7 percent.  In 2009Q1 the ratio was 70.5 percent—still over 70.0 percent on the fall in GDP despite about a 2 percent drop in consumption from it peak in third quarter 2007.  Consumer debt service as a percent of disposable personal income is up about 25 percent from 1980, to about 14 percent of disposable income.  One out of every six or seven dollars of the Americans family’s take-home pay goes to interest.  Using the more inclusive Financial Obligations Ratio, one out of every five dollars goes to financial payments.

The federal debt held by the public also increased dramatically from 1980, when the “supply side miracle” failed and the federal government taught Americans how to borrow heavily, with federal debt held by the public rising from 25 percent to now over 50 percent of GDP (data to 2009Q1), forecasted to rise to over 60 percent in coming quarters.



Increases in personal taxes to pay for bank bailouts and social programs will reduce disposable personal income.  Consumption spending hasn’t begun to revert toward mean values supported by income rather than debt, let alone adjusting for increased taxes.

Interest expense at the federal level will increase with the increasing debt, and over time, with increasing interest rates.  The average federal interest expense is 6.0 percent of GDP since 1939.  According to TreasuryDirect, the average interest rate on federal debt is now 3.5 percent.  A 1 percentage point increase across the yield curve would increase interest expense, cet. par., by over 25 percent, or about 1.5 percent of GDP.


And finally, don’t forget that the saving rate out of disposable income is expected to remain elevated as part of the new frugality, by four or five percentage points.

Adding it all up, a decline in consumption spending on the order of eight or ten percent doesn’t appear unlikely.




“The Federal Reserve Board has released revised data for the Household Debt Service Ratio from the first quarter 1980 to the present. According to the Federal Reserve Board, recent developments
in credit markets necessitated changing some of the sources used to calculate the ratio.
There are new sources for the distribution of loan types and for student loans, as well as updated
sources for loan maturities and interest rates. The change has shifted the level of the ratio down
but the movement has stayed roughly the same. The new release no longer shows consumer debt and
mortgage debt separately.”  The data is quarterly to 2009Q1.


  1. I came to the same conclusion with respect to interest rates. The Fed effectively neutered itself to fight inflation because interest rates can't be increased much without raising the specter of default. Without looking, I believe that 2008 US gov. revenues were around $2T. Once the service on federal debt approaches that point, all they can do is crank up the presses.

  2. Now running at $2378 bil annual rate 2009Q1, off more than 10% from a year ago.

  3. I should also note that when I say consumption has nowhere to go but down, I am referring to C/GDP.