Thursday, November 15, 2007

Kudlow 101: Is the Consumer Dead?

I doubt it very much.

Income, which is the basis of consumer spending, is soaring. Take a look at the following chart:

Real disposable income (income you get from working, after taxes, after inflation) is growing at better than 4 percent. That is huge.

Now, let’s take a look at the energy problem and gasoline prices. Let’s see what it looks like relative to income:

Observe that gasoline’s share of income has actually been falling over the past decade or so. It’s gone from nearly 3 percent, all the way down to only 2 percent.

Okay, last one. Take a look at this long-term chart about energy consumption and GDP.

You’ll see that energy consumption per dollar of GDP over the last fifty years has dropped substantially. In fact, it’s gone from 20 percent to less than 10 percent. That’s an enormous move.

Bottom line: Energy is much less important to the consumer than it was back in 1980 at its prior peak. Americans are working and have money in their wallets. So, contrary to some overly pessimistic prognostications, the U.S. consumer is not dead.