Gallup’s Spending and Jobs Survey Data Cast Doubt on the Strength of the Economic Recovery

Gallup has put up a summary graph of consumer spending over the last few years.  Happily, it begins with the tail end of the boom years.

This is not adjusted for price changes.  Thus, when respondents reported $64 daily spending three Januarys ago and $63 this January, then three years of price inflation needs to be subtracted from $63 to give the actual volume of goods and services consumed.  This data is one reason I am cautious about over-reliance on government reports or even diffusion indices such as the ISM or the various Fed surveys.  People know that the trend is not good.  Here is the Bloomberg Consumer Comfort Index:

Note this covers only a short period.  This index was at 0 in spring 2007.  It ranges from a maximum of +100 at best and a minimum of -100 at worst.  At the peak of the mega-boom in 2000, it was way above zero.

In addition to declining spending power, the majority of American adults are homeowners, and on average their housing equity has declined and only in rare communities has it appreciated as fast as the pace of general price increases.  So, in addition to diminished real spending power, the average adult also has had a negative wealth effect based on the typically largest financial asset he or she has, namely home equity.

Now, correlating with the recent improving BLS employment surveys, here is a link to Gallup on a continuously-measured hiring/not hiring survey (sorry, it does not copy).  No positive trend seen since the Great Recession struck.  You can clearly see how accurate and consistent this survey has been and how it correlates with the declining real, inflation-adjusted spending data.  The data still look mildly recessionary.  

It would be a mistake to ignore the government’s data, but we must remember that Friday’s good employment numbers will be revised and then re-revised.  At best they are only a snapshot of an unbelievably complicated economic world in a month in which much of the cold north had unseasonably warm weather that probably restricted layoffs.  No matter how hard Ben Bernanke and his band of Fedheads work, think and survey, they cannot possibly (in my view) exercise their immense powers optimally.  Given that they are human and all that.  The academic founders of the Federal Reserve System were under the naive impression that they were setting up an organization with three main purposes:  to have the U.S. join its major economic powers in having a lender of last resort (to lend, Bagehot-like, at high interest rates against good collateral in a crisis); to rediscount bills; and to have a flexible quantity of currency.

It is the last of the three that confuses people the most.  Back then, the concept of a flexible currency was the opposite of the way it began to be used.  The original idea was that when business waxed/waned, either seasonally or due to boom/recession, the Fed would allow the supply of gold-backed paper money to increase when there was more business demand and decline when there was less demand.  The Fed was neither pro-cyclical nor counter-cyclical.  It just stood by to assist businesses to do what they wanted to do. You may enjoy James Grant’s testimony before Ron Paul’s committee on this topic last year, as published by Mises.org, that is related to this topic, titled Over to You, H. Parker Willis. 

A couple of decent non-final jobs numbers and diffusion surveys don’t mean the economy has recovered, as the data shown above demonstrate; though the trend may of late be our friend.  As the above data show, many problems persist and have even worsened during the past few years.  I therefore think that the Fed is going to want to see sustained rises in nominal wages and nominal housing prices before it brings the final curtain down on ZIRP.  In other words, in my view, the evidence won’t be subtle when it moves far from the zero bound.  The Japanese experience involved at least one tentative move away from ZIRP before it was reinstituted.  

Keeping your eye on real-time polling data can help you cut through the media chatter, which is always and forever going to make you accept whatever point of view is hot at the moment.

Right now I’m just not seeing the clear turn in economic activity that I would like to see.  But I’m smelling more price inflation than I was last spring, when regular readers know I turned bullish on bond prices and bearish on all non-gold commodities.  Now I treat the following headline more as a contrary indicator than I would prefer to treat it as (click on headline to link to article): Bernanke Says He Won’t Tolerate Higher Inflation to Boost Employment Gains.