Here I go. I am about to walk into one of the biggest sucker’s games in the whole world of economics: declaring that the U.S. consumer is tapped out, so desperately in hock and troubled about the future that he finally just can’t spend like it’s 1999 anymore. And to be clear, that is what I’m declaring. Unless I can talk myself out of it by the end of the column.
I must be nuts. One of the most reliable ways to look like a business dope over the past several years has been to announce that the consumer spending party is finally over. Every year, usually in the fourth quarter, assorted boffins prove beyond doubt that U.S. consumers cannot possibly keep spending as they have been. Consumers then ignore those reports and keep right on spending anyway.
The question of consumer behavior is enormously important because more than 70% of U.S. economic activity is consumer spending. Most companies thus depend on our buying, which means that most of the valuation of the U.S. stock market depends on it also. And because we buy so many imports—almost $2 trillion worth last year—plenty of foreign economies depend on us as well. So it’s easy to see why everybody wonders what U.S. consumers will do next.
It’s also easy to see why all kinds of analysts figured we simply had to stop spending big a long time ago. A year or two back you could observe that interest rates were rising as the Fed kept ratcheting up, cash-out mortgage refinancings were declining, the housing boom was looking like a bubble, real total pay was flat, credit card debt was ballooning, and the personal savings rate had gone negative for the first time since the Depression. Sounds alarming, doesn’t it? No way could you expect people to maintain a high level of spending under those conditions.
So why did they? A few factors seem significant. Perhaps most important, people still had jobs. Even if total pay wasn’t rising much, employment was growing decently, and the unemployment rate stayed low. As long as consumers had paychecks coming in, they remained eager to do their duty at the mall. In addition, it was still possible to believe in the housing boom, that your home—unless it was a condo in Miami or San Diego—was making you richer by the day. When consumers feel wealthier, they feel like spending. It didn’t hurt that lenders on every street corner were throwing bargain-rate loans at anyone with a checking account; even if you didn’t borrow, it was comforting to know that you could.
What’s new—what gives me the confidence to make my insane prediction—is that all those factors have gone into reverse. The employment picture is deteriorating. Jobless claims rose more than expected in September’s final week, and the unemployment rate for the month rose slightly. The only reason it didn’t rise in August as well, says New York University professor Nouriel Roubini, is that “500,000 discouraged workers left the labor force and did not show up as unemployed.” That explains in part why Roubini, a former economic advisor in the Clinton administration, is now deeply bearish.
Perhaps more ominous than the job situation is the free-falling real estate market. Existing-home sales continue to decline. Home prices, which started sliding a little over a year ago, are now dropping faster, as measured by the S&P/Case-Shiller home price index. As millions of Americans see their largest asset becoming less valuable rather than more valuable, the wealth effect goes backward. And while consumers used to know they could always borrow more money, however appalling their finances, the credit markets faced reality in August and began pricing risk properly. Easy money and the comfortable feeling it supports are gone. Now add one other factor: $80-a-barrel oil as winter comes on. Put it all together, and it’s no surprise that the Conference Board’s consumer confidence index has fallen sharply for the past two months.
A consumer retrenchment may have even already started. Same-store sales at retail chains have dropped in recent weeks; overall retail sales have declined in real terms. Wal-Mart cut its profit forecast in August; in September, Target and Lowe’s forecast weaker sales.
So I haven’t talked myself out of my prediction. I’ve talked myself further into it. Note that I’m not predicting a recession, though one wouldn’t surprise me. But I believe the evidence is powerful that, as incredible as it may seem, U.S. consumers are going to start living within their means again. Brace yourself.
