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The return of the consumer

“American consumers are finally coming out of hiding,” reports the New York Times today. Retail sales are up, and people are now spending on items other than food and medicine, such as clothes, jewelry and cars.

Greater consumer spending is another sign – along with increasing employment and higher factory production – that economic recovery in the US is taking hold. I agree with Barry Ritholtz, writing at The Big Picture, that we need to be balanced about this:  "While the universe is not nearly as rosy as the front page of the Times (jobs and now retail) proclaims, it is also not as dire as the usual survivalists...have claimed."

In one sense, higher sales and a general recovery is good news: it’s far better than the alternative (a downturn), and - unlike the anti-materialists who blame greedy consumers for the crisis - I believe higher consumption is positive thing for society.

Yet it has to be recognized that today's increase in consumption is a one-sided development. For a start, much of the increase is due to wealthier people buying luxury goods, assisted by higher bonuses and better stock portfolios. This is no doubt linked to the improvement in the financial sector. But it’s less clear that your average worker is increasing his or her spending all that much, and thus it is questionable whether higher spending on the narrow basis of luxuries is sustainable.

Furthermore, economists point to the need for consumer spending to drive the recovery because, as the Times notes, it “accounts for more than two-thirds of all economic activity in the United States.” But that’s precisely the problem: the economy is skewed towards consumption and away from investment. And another problem: the economy is built on the shaky foundation of debt. Prior to the crisis hitting, consumer spending was not based on rising real incomes, but on greater borrowing. And now it appears that savings, which started to be restored over the past year or so, are again dropping while debt increases.

In other words, the crisis has not led to a thorough restructuring and the fundamental problems have not been addressed. The focus on whether GDP and other cyclical economic measures are trending upwards is really not the main point.

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