I'd have done this headline differently: Rather than say "Consumers slash spending" I would say "households are rebuilding savings." The most telling thing in this blog post yesterday is italicized:

Gasoline prices are down about $2 per gallon since the peak in July ... every $1 drop in gasoline adds about $100 billion to household cash flow � meaning households have an extra $200 billion to spend on items besides gasoline. ...

In addition, heating-oil and natural-gas prices are down since the summer. So the coming winter should prove to be less onerous than was feared when crude oil shot past $140 per barrel.

... Extremely low interest rates, for instance, are great for borrowers. Homeowners in good financial shape and with equity in their homes have rushed to refinance their mortgages now that rates have fallen close to 5% for a 30-year loan.

But low rates are a drag for savers. Data from the Federal Reserve show that households � spooked by the stock markets � have boosted their holdings of interest-bearing accounts by about $250 billion so far this year. But interest income has fallen by $25 billion over the same time, hurting retirees and others on fixed incomes.

What may be the biggest plus for the U.S. consumer sector is its ability to look forward. A survey by the Investment Company Institute in October showed that despite market volatility, investors remain committed to saving for retirement. Only 3% of participants have stopped making contributions this year.

So there's improvement in cash flow and people making commitments to rebuilding portfolios. While current dollar spending did fall 0.6%, in constant dollars (an iffy calculation here, but probably correct in direction) rose 0.6%. The decline reported is due to falling prices for food and energy.

the price index for PCE [personal consumption expenditures] decreased 1.1 percent in November, compared with a decrease of 0.5 percent in October. The PCE price index, excluding food and energy, was essentially unchanged in November and in October.

In real terms, people are getting more spending power, but are choosing to save it, particularly since the declines are likely seen as temporary. (The Federal Reserve and BEA use different data to assess savings, see here.) So if you haven't bought anyone special that Christmas gift, may I suggest a savings bond? Seems like that's what they want.

Labels: economics