Is the Consumer Engine Ready to Stall?
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?
When interest rates decline, life is easier for those in debt. For example, when a mortgage goes from 7% to 6%, that’s a 14% cost reduction. If the alternate minimum tax is reduced, that will help millions of middle class Americans. If the wars in Iraq and Afghanistan wind down (and aren’t replaced by a war in Iran), further tax reductions and increases in domestic government spending would be more affordable. Furthermore, there isn’t one America. There are folks who struggle in poverty and folks whose biggest problem is the high cost of tuning up the BMW.
It might be a problem for the economy if consumers curb their spending to absorb that debt for a few months. But as much as I philosophically detest the the bankruptcy bill that passed a few years ago for putting the onus on the wrong people, it may just save our bacon if things get worse.
That’s because the only thing worse than people paying down their credit-card debt is people walking away from it, which could send credit-card companies into a liquidity crisis a lot like the one we’re seeing in the mortgage industry.
Yes, the credit-card industry, like the mortgage industry, has committed its fair share of shameless and predatory abuses, aimed right at its most vulnerable targets. And then it went to Congress to see that it would get its pound of flesh no matter what else happened.
I don’t think that means that the card companies will be at the head of the line in case there’s a severe contraction, but I do think they’ll have scared more people who can pay most of what they owe into doing that than they would have otherwise. And if a big default were to come, they’d be in a stronger position to deal with it and not take the rest of the banking system down with them in a repeat of the last six months of the mortgage business.
This supposition that we are a debt society ready for failure is ignoring the past 60 years of economic success. America has always been an economic powerhouse which has been leveraged with debt of one type or another. With the devaluing of the dollar, combined with the increase in productivity, America actually has less debt and is more productive than in the past. Add to this the increased demand for US goods that a weaker dollar contributes, and you have the recipe for our national debt shrinking to multi-year lows. This is coming while our economy continues to boom and we manage to skip the onset of a formal recession. Inflation is minimal, and employment is at all time (frictional) levels.
A couple of comments….
Corporate retail, whose numbers are the ones being tabulated to report consumer spending, have struggled for years to generate consistent sales increases. Just as consumer spending on apparel has declined in real dollars, so has retail prices for apparel.
Further, there is an growing “long tail” market for goods of all sorts associated with ecommerce. Whether it be direct web sellers or sellers working through intermediaries such as eBay or Amazon Marketplace, corporate retail will likely experience an ever-increasing decline in it’s overall share of the retail business.
The long term trend is up, and everyone’s perspective on this is mostly personal, not necessarily reality. For example, the WSJ commented yesterday on a large scale study of tax returns of parents years ago compared to their adult “children” today, and the growth in income in real terms is substantial.
Will there be short term or local downturns here or there? Were there such 10, 20 or 30 years ago? It reminds me of the story about Soviet Russia where the common people used to say, if you need milk, go to the radio. (There was none in the store, but the radio was proclaiming abundance.) Today in America, one could say, if you are expecting disaster, turn to the main-stream media. (And a good deal of the non-main-stream media, too.)
It is sputtering because of the weak housing market. The housing crisis has as much to do with the change in bankruptcy laws as it does with adjustable rate mortgages. In the past, if someone got into financial trouble, say with catastrophic medical bills or a failed business, they could go bankrupt and discharge all of their debts except the mortgage and keep the house. Now they are put in the equivalent of chapter 11 where the bills are not discharged but payments must continue thus leaving their mortgage payment underfunded. Foreclosure is soon to follow, further dragging down housing values.
Every day there is a report on the country’s financial or economic position and every day there is a different view. To that point, I say it depends on what you read.
Yesterday, there was a report for the consumer index published by the University of Michigan, stating that, while the index for this year was slightly down, it was still ahead of last year. Is that a negative?
Also yesterday, Wal-Mart’s profit results purportedly accounted for a 300 point increase in the market. Now, that would be driven by consumer activity, would it not? It used to be said that what was good for General Motors was good for the country. Could that now be true for Wal-Mart? Things would certainly be bleak if that still held true by General Motors last report.
So, are things good? Are things bad? It certainly depends on your point of view. It also depends, however, on your own personal situation. If you lack health care or are paying a portion of your costs, that could be a huge factor in your point of view. If you have no health care cost concern and you are a family of four relying on a steady $50K per year income or less, energy costs could be a significant pinch to your overall budget causing changes in your activity. If you are neither, and went with a sub-prime mortgage or interest-only flexible mortgage, then you have a completely different view.
Then again, if you are an optimist, there are a completely different list of factors for you to chose from other than those listed to give an entirely different view.
I wonder what the message will be tomorrow. One thing is for sure–there will be a wide range of views as to the results of next Friday with no respect to the actual results.
Sounds like a lot of Doom and Gloom. Yes, disposable income and overall retail spending is down and will decrease even more. It’s actually an big opportunity for manufacturers and retailers to increase market share. I agree with Richard Seesel, that providing value and improved customer service is the key. Those who get creative with their marketing strategies will win big when the dust settles.
“According to Professor 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.”
I cannot agree with this comment. While we may need two cars, and are faced with expensive housing, the simple truth is Americans overspend. We don’t need to lease two new $30,000 cars every three years, we don’t need the constant home remodeling, we don’t need the elaborate wardrobes, we don’t need $200 monthly phone bills for ourselves and kids….
It is true that the current high prices for housing have consumed a larger chunk of the average household income. But on the flip, there are numerous areas where our spending is grossly overstressed on things we scarcely need.
Retail is going to continue to be impacted negatively by two completely different forces that have different causes and different constituencies, but will have the same effect–to slow the economy.
1. The over-spent over-leveraged consumer of all ages who has had little discipline over the last decade and is in financial straits. For many of them the mortgage crisis coupled with excessive home equity loans has put them at the brink. Even if fully employed they have little left to spend–on anything beyond the very basics.
2. The more highly disciplined upper boomer generation who are retiring and looking to simplify their lives. This large group has spent heavily but prudently in the past. They have recently looked thoughtfully inside their home(s) and into their closets and jewelry boxes and see there is little left to buy at retail. Their money spent in adventures and trips will indirectly flow into the retail economy but not to the same degree as before.
The unknowns of course, are how foreign purchasers of highly desirable American goods on a weak dollar will shore up the US retail economy, and how many still OK US consumers remain out there. I think there may be a lot more than are suggested in all the gloom and doom stories. When I see statements that it is “typical” to owe two months income in credit card debt I want to scream, “what is your base group? how do you know? where is your data?”
Real income, other than the top 5%, has not grown in the U.S. for 20 years. Until now, no major spending issues have risen from this due primarily to deflation (the Wal-Mart effect) and the low cost of capital and of course, oil.
All that has changed. I think we’re all in for a rude awakening. Especially considering the magnitude with which retail has grown over the last 20 years (over-stored). Time to batten down the hatches.
I don’t agree and that is because retailing is not static and prices are usually adjusted to fit demand. Chains have the ability to adjust markups accordingly and will do so to maintain sales. The rest of the economy may falter but I don’t think we will hit a brick wall. Yes housing is bad, and yes the dollar stinks but people around the world are still buying and the need for products, technology, raw goods and manufacturing are still high. Retail has always been fickle and with last year’s Black Friday, consumers are going to wait out for the best prices possible. In my opinion, the economy is shaky but I don’t think we’re going to fall off a cliff. More retailers are investing in customer service and product assortment and that is usually a signal that they are preparing for the worst but expect a return on their investment.
You can’t answer this question from a macroeconomic perspective. Grouping all income levels into the term “Americans” or saying the “typical household” doesn’t tell the tale. You really have to look at this from a microeconomic standpoint, but for the purposes of this discussion, I understand we can’t get that detailed.
Lower income families are challenged with the day-to-day fixed expenses. Many of these families don’t have mortgages and health insurance. Wal-Mart’s new slogan (“Save money. Live better.”) speaks to their customer base of lower to lower middle income consumers.
Many middle income consumers (lower middle, middle, and upper middle) have been operating on borrowed money through re-financing, home equity loans, and creative mortgage products, but now the wells are running dry and ARMs are exploding. It’s like midnight on Bourbon Street on Fat Tuesday, the street sweepers are working their way down but nobody wants the party to end.
There have been many retail segments that have benefited from the influx of this money, particularly the Home Center industry, but now they’ve got a big boo-boo. If wage growth was accelerating quickly it could help to ease the pain, but it’s not. Many homes are in foreclosure, credit card debt is high, etc…. My opinion is the middle income group has no choice but to cut back on spending to various degrees. The upper income consumer will keep spending.
This is an interesting discussion, because just yesterday evening I was meeting an old friend from my banking days for dinner. He works in the Home Equity business and was saying that Home Equity borrowing is still strong. Consumer Spending is good for the economy in general, but if that is happening on borrowed money, it may not be so good, especially if you are spending (living costs and loan payments) almost as much as what’s coming in. There is no room left for the possibility of income going down because of a contraction in the economy. Of course, interest rates will go down if that happens, which will ease some of the pressure, but not by a lot.
We are a society that has an insatiable appetite for excessive consumption that seems to have grown stronger each generation since the Great Depression. Unfortunately, debt isn’t conceived to be a deterrent to the “joy of spending” by a substantial number of consumers.
This socio-political myopia is cultivated by the government’s continuing spending example and encouraged by the credit card companies and stores, etc, who extend payments and charges almost to infinity. And infinity has a way of finally arriving at reality, which looms in the distant shadows. But unless the economy tanks or unless all future purchases must be paid for with cash, America will continue shop ’til it drops and spend until it goes to the bankruptcy courts for relief. Perhaps we actually believe we are entitled to too much.
When mortgage debt, energy prices and the cost of food all become excessive, something has to give. There isn’t much doubt that cutbacks on discretionary spending are already happening, judging from the soft sales reports coming from mid-tier chains lately. And the overall mood of uncertainty (reflected in the stock market) is typical of a pre-Election year.
How this affects individual retailers’ performances depends (for the short term) on how adeptly they can offer value and convenience to their customers. Wal-Mart and to some degree Target may end up being the biggest winners in the next several months, which is a big change from the perception a year ago that department stores had made a comeback. Mid-tier stores that focus on trade-up strategies may want to rethink how to recapture their value-oriented core consumer.
On the bridge clothing sales floor I do see women struggling with a real or perceived sense of financial uncertainty, but more than that, I see assortments that are off, off, off! Retailers need to be more nimble in responding to WHAT WOMEN WANT, not to fashion trends, because some trends are just bad and women know it. Case in point, the current empire waist balloon shirt thing that looks good on very few young bodies, let alone mature ones! This shape is everywhere right now, and my sales are great precisely because I find the best alternatives to it for women…. Maybe there ARE some global things to be concerned about, yet let’s focus incessantly on what’s within our reach to improve.