Chart of the Day: GDP Hits New High, But Americans Spending Like It's 2006

Some economists are trumpeting good news: U.S. GDP hit a new all-time high in the third quarter. This was one takeaway from this morning's report that the economy grew at a 2.5% annualized pace last quarter. So if economic activity is so high, then why does the economy seem so awful? How has consumer confidence -- which was at recessionary levels this month -- managed to provide a new high? The answer can be found by considering the fact that the amount of consumer demand per American hasn't recovered.

A few weeks ago, I explained that GDP per capita still lags. It remains at 2005 levels. This begins to show that economic activity isn't as good as it looks. But to zero in on consumer behavior, spending-per-capita should be considered.

Although consumer spending also hit a new high in Q3, that's in large part because more Americans are spending now than were a few years ago: the population has grown. Here's what the spending chart looks like if you divide it by the population in each quarter:

consumer spending per capita 2011-q3.png

This shows that consumer spending per capita remains just below the Q2-2006 level. In other words, the average American is spending as much as they did about five years ago.

So consumer demand now still isn't nearly what it was when it peaked at the end of 2007. At the rate of spending growth we saw during the third quarter (which was relatively brisk), it would take about another year to see consumer spending per capita hit a new high. Put another way, the average American is spending less now than before the recession. The GDP numbers don't account for how population has changed.

Still, firms can't really fully blame their lack of hiring on demand -- it just doesn't hold up. As mentioned, aggregate real spending has hit a new high. So why are the number of employed Americans still so low? About 6.3 million fewer are unemployed now than in the first quarter of 2007.

For one thing, consumer spending isn't the entire story. For example, it doesn't include expenditures on home sales or business structures. And of course, construction was an industry that lost millions of jobs. It also doesn't include other business spending, exports, or government spending. These factors account for a part of the answer, but firms are also making current employees work harder: productivity is higher.

So really, firms aren't looking for consumer demand to return to hire more people -- it's already there on an aggregate level. If consumer confidence rose and pushed spending per capita back to its 2007 level, then hiring should also rise. But even then, some industries that have experienced structural problems aren't hiring anytime soon, like construction and financial services. Others' problems might be more cyclical in nature, but those firms are experiencing higher levels of productivity. So they're in no hurry to hire either.

Put another way: jobs are going to continue to trickle in slowly. There's no quick fix here.