Consumer spending trends

We all know that there are many Americans suffering economic hardship right now because they are out of work, lost a lot of their retirement funds, or have lost value in their houses. All of these factors create a reduction is spending for two reasons, lost of immediate income and loss of credit.

Now, the opposite is true as well. When an unemployed person gets a job, they suddenly have much greater access to credit. Rightly or wrongly, a newly employed person often starts to spend future income in order to get items that were put off because of their financial situation and because they simply feel better.

This trend also exists in homeowners who refinance and of course if retirees get increased retirement income. However, the new job impact is normally the greatest. This is a much faster increase than the opposite, since when you lose your job you don't immediately lose your access to credit and usually for a few months, consumption drops slowly.

What does this mean for the economy? Well, right now we are still losing jobs on a net basis. However, we are seeing signs of a bump up in the economy from the stimulus programs as well as the fact that industry needs to restock inventories that were burned off in the first half of this year. Now in any given month, a certain number of people are hired and a different number are let go. So, even in periods with net job loss, we often see increases in consumer spending, since those getting jobs start spending faster than those losing jobs stop spending. There is therefore a tipping point where consumer spending increases enough in this economy to have demand exceed supply, requiring an increase in production.

When that happens the economy is in recovery. Recovery's feed upon themselves. More demand creates more economic activity creating more jobs. Other factors of course are related to imports and exports and whether the jobs created are in this country or elsewhere.

I believe we have passed that tipping point and are creating enough jobs to increase spending over the decreased spending from job losses. So with increased spending and inventory replenishment we may have a very good fourth quarter, better than many expect.