How Consumers Managed to Spend More in 1Q 2009

By now you have read about the GDP decline in the first quarter of 2009.  It was the second quarter in a row of a more than 6% decline at an annual rate.  Of course, when we speak of such numbers we are usually referring to inflation-adjusted or real GDP. And that can hide some interesting anomalies.

 

For example, the real numbers show that Personal Consumption Expenditures rose by about $44 billion vs. $28 billion in current dollars.  That indicates that the prices paid by consumers went down, as indeed they did.  But a look at where prices went down the most shows what really happened during the quarter, which was that substantially lower gasoline and fuel oil prices effectively financed higher consumption in other areas.

 

Expenditures in Current Dollars

1Q 2009 vs. 4Q2008

           

            Personal Consumption Expenditures………………+$27.8 billion

               Motor Vehicles and Parts…………………..+14.8

               Furniture and Household Equipment……….   +0.6

               Food………………………………………..+0.4

               Clothing and Shoes………………………….+6.6

               Other………………………………………+16.8

               Medical Care………………………………+18.9

               Other Services……………………………  +19.7

                                                   Subtotal                    +77.8               

               Gasoline and Energy………………………   -50.0

                                                    Total……………. $27.8                          

 

There it is: A $50 billion “tax cut” in the form of lower gasoline and fuel oil prices enabled about two-thirds of the increases in other consumption spending of $77.8 billion!  Because gasoline prices were even higher in the second and third quarters of 2008 the same dynamic was present in the fourth quarter of last year in an even greater magnitude.  Gasoline and fuel oil expenditures in the fourth quarter were a whopping $145 billion less than in the third quarter, a huge cushion to spending at a crucial time.

 

But…..now….the gasoline tax cut has dissipated, and coming to the rescue are the Obama Administration’s tax cuts.  In fact, the cuts began to be felt in the first quarter.  Personal income declined modestly in the first quarter, by $60 billion or 2% annual rate. But personal taxes were down by $193.5 billion, some part of which was the result of the tax cuts, so that disposable income rose at a 5% annual rate.  Putting taxes and lower gasoline prices together gave consumers $243.5 billion more to spend or save than they would otherwise have had, which accounted for the rather amazing performance of consumption in the face of immense job losses.

 

I’ll write about other aspects of the quarter’s GDP tomorrow.

 

 

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4 Responses to How Consumers Managed to Spend More in 1Q 2009

  1. Jeff says:

    Interesting articles.

    Question:

    How did you arrive at the 143.5B of extra consumer dollars? It seems you subtracted the 50B from the 193.5B, but since those were both savings (gas & tax) why not add ’em? Then subtract the 60B of loss income which would be 183.5B of additional consumer dollars.

    Thanks.

  2. Paul F. Miller, Jr. says:

    Jeff…..You are partly right. The $50 bill should be added to the tax reduction of $193.5 …the “extra dollars consumers had was $243.5 not $143.5. I really DO know that but mistyped the latter number with a 1 rather than a two. But the two numbers are distinctly different. The reduced taxes were an addition to disposable income, not personal income. And reduced gasoline prices enabled a REALLOCATION of spending, but were not an addition to personal income. My point was that consumers had $50 billion to spend on things OTHER THAN gasoline and fuel oil, and NOT that their income went up. The $50 billion was not an addition to personal income….it was just a reallocation of spending. What I could have said is that lower gas prices increased consumer discretionary spending, assuming that gasoline is nondiscretionary spending

  3. Arden says:

    Hi Paul, your article got me interested in looking into the detailed PCE data and I was hoping you could help me with a question I have. I was able to see the ‘current dollar’ data totalling $27.8 billion but how do you get the ‘real’ number of $44 billion?

    Thanks.

  4. Paul F. Miller, Jr. says:

    Arden…..the $44 billion is the difference between the 4thQ spending of 8170.5 and the 1stQ of 8214.2…..these are the real or inflation adjusted numbers as opposed tothe current dollar numbers. I know, it gets confusing when the inflation adjusted figures are bigger than the unadjusted numbers, but that’s what happens when prices go down..

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