Consumer spending has driven U.S. economic growth going back decades. While there have been some fairly sizeable bumps in the road at various points over the years, consumer spending has remained strong even at times when many expected it would not.
Elizabeth Warren, a professor at Harvard, believes the good times are going to end soon as consumers come face-to-face with the piper and find they haven't got the pay to hear him play.
Prof. Warren spoke with Doug Krizner on National Public Radio's Marketplace program. "We've built this latest economic boom on borrowed money. Consumers, to the extent that they've stayed afloat, have managed to stay afloat by using their credit cards and by taking out home-equity lines of credit."
According to Prof. Warren, the problems Americans face is not because they are necessarily over-consuming but, instead, are paying too high a price for a variety of "fixed" expenses. With so much money going out to pay what amounts to essential spending, consumers have less room to maneuver when it comes to reducing debt.
"American families are getting ruined financially is in the areas of mortgages and health insurance. The fact that they've got to have two cars, the fact that they've got to put their children in child care, their taxes -- the things over which they have little or no control," she said.
"Let's look at the basics. What families are spending on clothing in the last 30 years, it's down 33 percent in inflation-adjusted dollars. What they spend on food is down about 20 percent. What they spend on appliances, down about 52 percent. It's not stuff that's driving families to the poorhouse."
Of course people in the poorhouse don't do much spending at retail.
"The typical family is carrying now about two months' worth of income in credit card debt," said Prof. Warren. "So what's going to happen long-term? Do we have a period where all these families that are carrying all this debt simply cut back on their consumption so that they can pay off the outstanding debt loads? Is that gonna be a long, slow decline, or is it going to be a one-time smack? Either way, the consequences for the economy cannot be good."
Discussion Question: Do you agree with Elizabeth Warren that Americans are not over-consuming but instead are being challenged just dealing with day-to-day "fixed" expenses? What do you see as the biggest financial challenges facing American consumers and what are the implications for consumer goods marketers and retailers? Do you foresee a need for the government and/or other entities to somehow intervene to take the load off of consumers?