You Know Inflation’s a Problem When the Cereal Box Gives Away Gas Cards
Elections are important, maybe even the cornerstone of a democracy; but sometimes voters are just too busy to listen to everything being said by the Obama or Romney camps. Thank heaven sound bites can sum up everything we think we need to know.
Here are some recent tidbits from Capitol Hill:
The U.S. Department of Labor recently said that unemployment plummeted in September to 7.8%—the first time the rate dropped below eight percent since February 2009. (Source: “Employment Situation Summary,” Bureau of Labor Statistics, October 5, 2012.)
Auto sales rose in September by 13% from a year earlier to nearly 1.2 million. (Source: “September 2012 Auto Sales,” Automobile Magazine, October 9, 2012.) U.S. home sales jumped to their highest level in two years, and builder confidence has reached its highest level in more than six years. (Source: WRAPUP 2-U.S. new home sales dip, but prices scale 5-year high,” Reuters, September 26, 2012.) Consumer confidence jumped in September. (Source: “Consumer Comfort in U.S. Stayed Near Three-Month High Last Week,” Bloomberg, October 11, 2012.)
Yup, everything is rosy. The U.S. economy is picking up steam, the housing market is turning around, and the U.S. is creating jobs. The economic turnaround is in full swing, and Americans are happy.
But if you believe the economy is getting better, you must truly be the world’s greatest contrarian, despite the overwhelming evidence to the contrary.
I think it’s all about perspective.
The so-called “encouraging” news reminds me of that scene near the end of Titanic, where a deckhand fires off a rescue flare into the night; people onboard the sinking ship or in the lifeboats “ooh” and “ahh” at the illuminated sky. Surely a rescue is at hand. Then the camera pulls higher to reveal the vast and total darkness and the pin-prick light of the flare being swallowed up by the night sky. It appears the tiny light was nothing to get excited about.
Unfortunately, the meek trickle of positive data is nothing to get excited about, either. Even at $95.00 a barrel, oil prices are still high; the underemployment numbers are dismal at 14.7%—virtually unchanged since May 2012; and the average American is still living paycheck to paycheck.
I enter as evidence what could be one of the only examples of economic truth in advertising. In the past, cereal marketed to kids always included a prize; there was no point in picking it up if it didn’t. This past week, I picked up a box of cereal that instead of offering a toy, offered a $5.00 pre-paid gas card. This might be a children’s cereal, but it was geared towards parents facing economic hardships.
Americans are out of work and their dollar doesn’t go as far as it used to. Even a cereal company knows this and wants to help average Americans stretch their dollar. Consumer spending might have been the engine of economic growth, but for now, those heady days are over.
In dollar terms, personal consumption expenditures in the third quarters of 1977, 1987, 1997, and 2007, were 62.5%, 65.9%, 66.7%, and 69.5% of gross domestic product (GDP), respectively. (Source: “Don’t Expect Consumer Spending to Be the Engine of Economic Growth It Once Was,” The Regional Economist, Federal Reserve Bank of St. Louis, January 2012.)
Recession or not, consumer spending was, and is, a large part of the American economy.
With current unemployment and inflation rates, consumers have no choice but to cut back on spending. As a result, consumer spending can no longer be the go-to engine for sustained economic growth.
Nor will other countries be able to rely on U.S consumer spending to be their economic engines; these countries currently depend heavily on U.S. purchases for their exports. The decline in consumer spending will not only force the U.S. government to restructure its economy, but it will force everyone else to, as well.
Rosy numbers aside, it’s only going to get worse.