14 November 2008

Stupidly Optimistic (or what if consumption were finally sustainable?)

Retail sales plunged by a record amount in October as shoppers reined in spending with home prices falling, although plunging gasoline prices also reduced outlays by consumers.

Sales slumped 2.8 percent last month to a seasonally adjusted $363.7 billion, the largest decline since the series began in 1992, the Commerce Department said. The previous record was a 2.65 percent drop in November 2001 in the wake of the terrorist attacks that year.

Retail sales fell 1.3 percent in September. Meanwhile, consumer confidence rose unexpectedly, according to a survey released Friday, as tumbling gasoline prices offset worries about unemployment and recession. [full story here]

There are two reasons that consumption has dropped. Both seem to me like good reasons.

One is that the cost of things has dropped. Home prices during the last year and gas prices in the last couple of months have plunged. If you "consume" the same amount of gas or new houses, your total consumption drops. That seems like a good thing.

Today at Costco, gas prices were 2.09 a gallon - down about $114.00 a gallon from just months ago. I felt so excited about the low price that after I filled up I drove around the block and came back for more. I repeated the drill half a dozen times - I just could not resist filling up when prices were so low.

Home prices are down. My children have got a chance to actually buy a home here in San Diego someday. Why people thrill at rising home prices escapes me. Housing - like fuel or clothing - is a cost and if it is lower we have more money for other things.

And finally, consumption is down. Keep in mind that we've been saving about 0% of our income for the last decade or so. This kind of behavior falls into the category of unsustainable. We can't continue to consume at such a rate. That consumption has dropped is great. It suggests that we have a chance to get savings and spending set at rates that can be sustained for more than a mere decade or two.

The bad news is that the economy is staggering. The good news is that this difficult adjustment might just result in a new level of consumption that can be sustained. It doesn't surprise me that consumer confidence is up.


Anonymous said...

Tell me. Does georgey get credit for the low gas prices?
It seems only fair, was he not just recently blamed for the exhorbitant gas price last summer?
-wife of repub wants to know.

cce said...

It's all relative I suppose. But if you're one of those people who had the misfortune of buying a house some four years ago and now need to unload it for less than you paid even though you've spent $150K on repairs and updates, it's damn hard to be optimistic.

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Ron Davison said...

let's give George credit for the low gas prices. They stem from a fall in demand and resultant collapse in speculation, so, yeah. Let's credit Georgey with that.

it is rough. I'm sorry. Transitions are always tough but if we'd had house prices rise by 8% a year for years it would not be rough - it would be impossible.

I'm sure that my high school guidance counselor would be utterly unsurprised by this.

David said...

Gas doubled since Pelosi took over and now it's halved. Let's hear it for Nancy!

Alles is gut except that consumer confidence is down according to the media this morning.

I like Rush's concept of "the Obama recession." It's wrong of course at least until 20 Jan 09 when it becomes right.

Ron Davison said...

I find it interesting that conservative friends blame Clinton for the slow down that started AFTER Bush took office but now are attributing this slow down to Obama BEFORE he takes office. So, Bush is not responsible for the slow down that happened early in his administration nor the one that began late in it? If this is accountability, sign me up.