$GS: U.S. Suffers a Consumption Setback

“I recently posted two pieces discussing that the peak of economic growth was likely behind us.  (See here and here) In particular both pieces addressed personal consumption expenditures and their importance to the overall strength and direction of the economy.  To wit:

“…personal consumption expenditures (PCE) comprise about 70% of the gross domestic product calculation.  As PCE goes – so goes the economy.”

The importance of consumption on the overall economy should not be overlooked.  While, in the economic cycle, it is production that comes first, as it provides the income necessary for individuals to consume, it is ultimately consumption that completes the cycle by creating the demand.  This is the problem that government, and the Fed, face today.

Despite repeated bailouts, programs, and interventions – economic growth remains mired a sub-par rates as consumers struggle in a low growth/high unemployment economy.  Businesses, which have been pressured by poor sales, higher taxes and increased government regulations, have learned to do more with less.  Higher productivity has lead to less employment and higher levels of profits.

The dark side of that equation is that less employment means higher competition for jobs which suppresses wage growth.  Lower wage growth and incomes means less consumption which reduces the aggregrate end demand.  In turn, lower demand for products and services puts businesses on the defensive to “do more with less” in order to protect profit margins.  Wash, rinse and repeat.  This is why deflationary economic environments are so greatly feared by the Fed as that virtual spiral, between production and consumption, is incredibly difficult to break.

This brings us to the latest report from Goldman Sachs entitled “The Consumption Setback” (via Zero Hedge) which discusses the reality that consumer is slowing down which will likely have a negative impact on future growth.  This is a fairly sharp turn from their previous stance of an economic comeback in 2013 which I have previously argued heavily against.

A Consumption Setback

Coming into this year, we expected a notable slowdown in real personal consumption expenditures (PCE) from around 2% in 2012 to a 1% (annualized) pace in the first quarter of 2013. The main reason was the hit to disposable income resulting from…..”

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