The Reluctant Consumer

John Carney suggests that the downward GDP revision was basically a self-inflicted wound.

The main culprit behind the consumer pullback seems to be what Fed Chairman Ben Bernanke calls “fiscal headwinds.” Specifically, the end of the payroll tax holiday left less money in the hands of consumers to spend. We taxed ourselves out of growth.

“The lower consumption estimate provides some indication that the impact from fiscal austerity may have been more than previously thought, and that the economy started the year on weaker footing than previous estimated,” TD Securities analyst Millan Mulraine wrote in a note.

But don’t entirely discount the federal spending cuts known as “sequester,” which kicked in on March 1. Even though the sequester did not directly diminish government spending by as much as possible, its anticipated effects may have dampened investments.

Not so fast. If you flip over to the WSJ Real Time Economics Blog you’ll see an interesting chart which shows that consumer spending just hasn’t been up to the job throughout the recovery. In fact, the average contribution of consumer spending to the quarterly change in GDP for pre-2009 recoveries was 2.61% while the average for this recovery is 1.52%. I suspect that there are multiple factors weighing on the dearth of consumer spending. I’ll buy the argument that the end of the payroll tax holiday was one of them but I think the sequester line is a stretch. Most Americans were more interested in the Super Bowl and March Madness in Q1 than they were in arcane political budget squabbles.

A weak consumer is one big problem. The cause is multifaceted.

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