<eugen at leitl.org> on
Wed Oct 17 02:03:02 PDT 2007
The consumer buying binge is over
It's been said many times, but now consumers are truly tapped out, says
Fortune's Geoff Colvin.
By Geoff Colvin, Fortune senior editor-at-large
October 16 2007: 9:26 AM EDT
(Fortune Magazine) -- 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
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
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
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 (Charts, Fortune 500) cut its profit
forecast in August; in September, Target (Charts, Fortune 500) and Lowe's
(Charts, Fortune 500) 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. Top of page
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