Here’s a thought.
Anytime your GDP depends on consumer consumption for the bulk of its growth, you’re in trouble—-especially when those same wallets start closing up.
It’s just that simple.
Unfortunately, that’s exactly where we find ourselves today since consumer spending accounts for 72% of the U.S. Gross Domestic Product.
That’s a heavy burden in an age of declining real incomes and fast rising prices.
Sure, it worked like a charm when home prices doubled, but now that housing is in decline it has gotten much tougher to maintain.
But in America, there is a way to get blood from a stone. It’s called credit, and to many it’s their lifeline.
That goes for the overall economy too-buying stuff keeps us afloat.
That’s why in the wake of 9/11 we were urged to head off the mall. And it’s the reason why the IRS can’t get those “stimulus checks” out fast enough these days.
However, the problem is that none of that “free money” solves anything for long.
And when it’s all said and done, the truth remains—-we spend considerably more than we earn.
That to me is something of a problem, not a solution.
You see, we used to be a nation that saved and produced. Today, however, all we do is spend and consume.
That’s how you end up depending so heavily on consumer spending for growth.
But what happens when those same consumers decide to step away from the game?
That’s what’s in the news today as consumers struggle to make ends meet.
From AP by Anne D’Innocenzio entitled: Consumers give stores some relief but still spend cautiously
“Consumers gave some of the nation’s retailers a little relief in April after months of dismal sales, gravitating toward less expensive discounters and wholesale clubs but generally still shying away from stores selling clothes and other non-necessities.
Monthly sales reports issued Thursday were better than expected, but still pointed to a consumer contending with rising gas prices, sagging home values and worries about jobs. Wal-Mart Stores Inc. and Costco Wholesale Corp. were among the top performers last month, while most mall-based apparel stores struggled.
“Consumers are focusing on value and price points and stretching their dollars,” said Ken Perkins president of RetailMetrics LLC, a research company in Swampscott, Mass. “They are feeling the pinch on multiple fronts.”
He and other analysts expect only a modest uptick in sales in May and June as consumers spend tax rebate checks that are starting to arrive.
“There’s too much going on,” in the economy, Perkins said. He and others expect shoppers to use the extra cash to pay down debt and catch up on utility and food bills.”
Meanwhile, consumers are increasingly turning to their credit cards in an effort to pay the bills.
From Bloomberg by Vincent Del Giudice entitled: U.S. Consumer Debt Rises More Than Forecast in March
“U.S. consumer borrowing jumped more than double the amount economists forecast in March, indicating a slowing economy is forcing Americans to accumulate credit-card and other forms of debt.
Consumer credit increased by $15.3 billion for the month to $2.56 trillion, the biggest monthly rise since November, the Federal Reserve said today in Washington. In February, credit rose by $6.5 billion, previously reported as an increase of $5.2 billion. The Fed’s report doesn’t cover borrowing secured by real estate, such as home-equity loans.
Consumers are turning to credit cards after banks tightened standards for home-equity loans and other borrowing. The March figures brought U.S. consumer borrowing in the first quarter to $34 billion, the most since the first three months of 2001, when the economy entered its last official recession.
“Consumers are strapped as incomes are not keeping up with inflation and this is leading them to rely increasingly on credit to see them through the worst housing downturn since the Great Depression,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi in New York. “The days of extracting cash from one’s home to spend on goods and services are long gone.”
Economists forecast an increase of $6 billion in consumer credit for March, according to the median of 34 estimates in a survey conducted by Bloomberg News.
Total borrowing, a key element of consumer spending, increased at a 7.2 percent annual rate in March after rising at a 3.1 percent pace during February, the Fed said.
Household spending grew at the slowest pace since the 2001 recession in the first quarter, according to Commerce Department statistics. Consumer spending accounts for about two-thirds of economic growth.
A Fed report two days ago showed the proportion of banks making it tougher for companies and consumers to borrow approached a record in the past three months.
About half of U.S. banks said they tightened terms on existing home-equity loans, mainly because of declines in home values below appraised values, as well as increased defaults and changes in borrowers’ finances, according to the Fed’s quarterly survey of senior loan officers released May 5.”
So here’s my instant analysis: It’s getting ugly out there.
After all, you can’t borrow your way to prosperity forever.
By the way, here are two charts. One is the personal saving rate and the other is consumer credit. Notice how it all began to change in the early 80’s.
That’s about when I got my first credit card offer. I was a sophomore in college.