Have Consumers Gone on Strike?

Man shopping for clothes
UpperCut Images | Getty Images
Man shopping for clothes

The economy may be in worse shape than many economists and businesses expect.

Orders for US durable goods—manufactured items expected to last more than three years—were predicted to rise 1.5 percent overall, and to rise 2.5 percent excluding the volatile transportation sector.

Instead orders fell 0.9 percent overall, and 0.6 percent net transportation.

That’s a huge gap between expectations and actual numbers.

For several weeks, consumer activity has been tracking significantly lower than the expectations of economists. Similarly, the consumer numbers—consumer purchases, consumer sentiment, home sales, home prices—keep showing up lower than you would expect based on business numbers—employment, manufacturing orders, factory production.

What seems to be happening is that businesses have been ramping up their production and hiring in expectations of strong consumer demand.

Consumers, however, have failed to provide that expected demand.

The Obama administration’s payroll tax cut may be contributing to this widening gap between expectations and consumer activity. The administration expected the temporary tax cut to stimulate more spending by consumers, boosting overall activity. But it now appears that the stimulus effect was over-estimated, as consumers have decided to save more of the tax cut than they spent.

The relationship between durable goods orders, economic growth and stock markets is ambiguous. Sometimes drops in durable goods orders are accompanied by falling stock prices and a slowing economy.

Sometimes they go in opposite directions. Although durable goods orders are described as a "leading indicator," it's not exactly clear whether it is very good at forecasting the economy or financial markets. Part of the problem may be that durable goods is a broad category that includes both consumer appliances and businesses equipment. This means that if economic expectations of businesses and consumers diverge, the data may be more noise than signal.

If the increased hiring and production by businesses can drag reluctant consumers into spending, the effect may be a supply-side driven economic boost. But if consumers continue to hold out—refusing to drive up demand at the cash register—businesses could find themselves with a surplus of inventory and employees. Liquidating the newly created inventory and jobs could push the economy into a renewed economic slump.


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