For at least the past decade, anyone who has bet against the
resiliency and unending spending capacity of the U.S. consumer has decidedly
lost the wager. Even through the recession of 2000-01, they hardly slowed their
profligate ways. 9/11 managed to create a pause in spending – at least for a
short time – but it was more than made up for in the ensuing quarters.

Indeed,
the careers of Economists who have declared the U.S. consumer to be tapped out
litter the countryside like corpses after a war.

There are early signs, however, that taking the other side
of this bet is no longer a sure thing. We see a variety of factors suggesting
that the consumer, while not yet exhausted, is slowly but surely moving in that
direction. While it is premature to declare the American consumer “shopped
out,” I suspect it is now quite late in the cycle. Barring a significant
improvement in economic fortunes, including robust job creation and increased
personal income levels, that exhaustion now looks all but inevitable.

First up: Energy. Despite the same economists telling us how much smaller
energy is as a percentage of GDP than in the 1970s, high-energy prices still
hurt spending. How bad are the gas pains? Well, if the increase in drivers
using credit cards to manage gas costs
is any indication, pretty bad.

Weak back to school sales are another sign of Personal Spending
slowing. The National Retail Federation noted the “dip,” blaming (of course) energy prices. This is consistent with an
Opinion Research Corp. (Aug. 18-21) survey cited by
ICSC.org. It showed that 58 percent of
households are reducing their discretionary spending on clothing, shoes,
jewelry and consumer electronics, as well as restaurants, spa and beauty
services, and other nonessential purchases.

The recent drop in Consumer Confidence also is energy
related. The danger, according to Oxford Analytica, is that “persistently low confidence
undermines consumer spending.”

Further, its not just the Wal-Mart shopper who
feels the pinch; Even high end consumer electronic sales are expected to dip next year.

My best guess — and its only a guess — is that the combination of energy prices
combined with the end of the easy refi money will be a serious one two punch.
Add to that big expenditures for discounted GM vehicles, and you have the
makings of a wobbly consumer.

The key tell: Look to see how this holiday
shopping season is. If its more difficult for retailers than expected, we will
have unequivocal confirmation that the consumer has finally exhausted
themselves.

Category: Commodities, Economy, Investing, Markets, Psychology, Retail

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

23 Responses to “Time to Bet Against the U.S. Consumer?”

  1. Regis says:

    This is a line of thought that I’ve been following for about the last two months. Living in Southern California is a unique view to the hyper-consumerism that has engulfed the average consumer. It is almost unbelievable, the amount of ‘stuff’ that everybody is buying. The new Visa Debit Card commercial tidily sums it up, when it portrays a woman piling goods twenty five feet high on the baby stroller as she swipes the card again and again. Many of us prudent people sitting on the sidelines of this circus, wonder just how in the hell they’re doing it. Quite a few of us know people who’ve cashed out their equity on their house, not once, but at least twice or even more to pull cash out for frivolous purposes. Ask any native SoCal resident if they know anybody who’s in ‘debt up to their eyeballs’ and you’ll almost get a positive response each time.

    Fiscal caution is unheard of. Just a week ago Thursday, I was driving by the huge Ontario Mills Mall on the freeway and I looked overa and saw the stadium-sized parking lot was packed nearly to maximum. Those of us who watch the underlying current saw the sharp drop in the durable goods figures earlier and knew the Consumer Confidence Index would follow. While I’m not going to spout conspiracy, most Americans are (or were) blissfully unaware of the storm building up. Funny thing about Thursday night’s MSNBC Asia Watch. Not a single mention of the durable goods or the American consumer. But Stephen Roach at Morgan Stanley has had that subject nailed. Come Friday and Saturday, the housing bubble news is all over CNN, Fox and Bloomberg. Too late. It’s become a ‘me-me-me’ melee here and the SUV crazed hordes with the usual blatantly ‘bling-bling’ 23 inch wheels on their vehicles are commonplace (for now…). It’s coming, not sure how big, or how strong, but the party is over.

  2. frank says:

    About use of credit cards to purchase gasoline; I’ve read several stories about an increase in the number of ‘drive offs’ (people buying gas and then scampering off without paying) prompting more service stations to demand prepayment. That may contribute some to an increased use of credit cards, but still it just stands to logic that people have to make adjustments somewhere and falling back to the credit card probably comes to mind first.

  3. Larry Nusbaum, Scottsdale says:

    Posted by: Regis |”Ask any native SoCal resident if they know anybody who’s in ‘debt up to their eyeballs’ and you’ll almost get a positive response each time.”

    1. And, my guess is that they also never dreamed that they would have so much wealth from so little work.
    2. But, why do you think that most pro boxing champs retire broke? Or so many lottery winners wish that they had never won?
    WOULDN’T IT BE GREAT IF WE TAUGHT PEOPLE HOW TO HANDLE MONEY EARLY IN LIFE?

  4. JWC says:

    I can only go by what is happening with my grown children. Daughter and her husband have good jobs and high income, she just traded “down” to a smaller SUV that gets better gas mileage… (from horrible to just bad, but still less). She is encouraging her daughters to drop out of gymnastics (one did) because of cost.

    My son and his wife do not have the great jobs. Credit cards are probably maxed and I fear what is going to happen if their minimum payments go up. I’ve offered to pay for my grandson’s Tai kwan Do (sorry about the spelling, not sure what it is) so he can continue with the one extra thing he enjoys. My DIL is really worried about finances and I worry if I will be able to help if all hell breaks loose. I have a rule that I never help my children out of messes they have made themselves, especially credit card debt, but I won’t let my grandson lose his home either.

    My point is while I’m sure the increase in gas prices is really hurting my son, it has also made my daughter who is in a much higher income bracket change some of her spending habits. Neither family is going out to eat as much or spending as much on extra’s such as the gymnastics lessions.

    My hubby and I, with no debt and stable income, are watching our driving habits more carefully.

    Sooner or later this is all going to catch up with the economy.

  5. Larry Nusbaum, Scottsdale says:

    JWC: I feel for you. But, why can’t Americans simply live (spend) at or below their means? What that would entail is the strength to have no consumer credit cards and therefore no consumer debt. I believe that is the key to financial freedom.

  6. donna says:

    “But, why can’t Americans simply live (spend) at or below their means? What that would entail is the strength to have no consumer credit cards and therefore no consumer debt. I believe that is the key to financial freedom.”

    Sssshhh, Larry, don’t tell! What would we ever do if Americans figured this out?

  7. Craig Stevenson says:

    It amazes me, too. I’m 34. Lost my job around 9/11. Haven’t been able to find a decent job. Dalied in real estate and sold. Did some other business ventures and made some money. No debt. No credit cards. Paying for a Masters degree in cash (forked over @ $4,000 today). I have a 31 year old Mercedes diesel (beautiful) gets 40 mpg. Haven’t bought anything but the basics for a few years. Why I state all this?

    I can’t understand what they are doing? I can’t understand why they are undermining the reserve status of the dollar. I can’t understand why Americans are spending spending spending while the jobs of the future will be going going going to the most educated in a world becoming ever more educated.

    I watch my brother with a corvette, a large truck, and spending like there is no tomorrow. I watch my cousin build 20 houses and hold for Section 8 money. This recent rise in governement spending, lowering of taxes, increase in foreign borrowing and the unsustainable current account deficit are all working to signifigantly alter the society that we live in.

    Movements away from dollar assets only portend increases in rates down the road and signifgantly greater costs. Plus, all this spending has mostly gone only to serve the exporting nations and MNC’s while the use of trillions of dollars has been squandered upon the taste of a consumer rather than enabling long-term growth through critical investment in R&D, education, infrastructure, etc…

    Frankly, it is my opinion that the generations that have preceded me have taught their children poorly. Further, I believe the fallout from these excesses will be large and long-lived. In this world of globalization we will surely be losers as others work far harder for far smaller pay. The holders of capital are now firmly entrenched. They will make use of the genius resident in China and India, Thailand, Taiwan, Malaysia, and Korea. While we, the middle class, paid for it as Republicans drive us to extinction with 37 trillion in debt to redeem.

  8. kennycan says:

    Most people (all?) on this thread can understand that it is the spend part of the equation, not the financing part that is the problem when it comes to individuals. You can either fund for current revenue or borrow, with borrowing allowing “deficit” spending for individuals. However, when it comes to government, they get all partisan. Government Spending is the problem. Governments have two ways they finance their “deficit” spending. They can take from the people today (higher taxes) or they can take from the people tomorrow (issue bonds) but in the end it is the excess spending that hurts us. In the end the people pay for it – today or tomorrow. So Republicans (borrow and spend) and Democrats (tax and spend) can share equally the blame for the government mess we’re in now. No need to get all partisan about it.

  9. T.R. Elliott says:

    Kennycan: The one difference: Republicans are prodiving services to the present and sending the bill to the future.

  10. Larry Nusbaum, Scottsdale says:

    Posted by: kennycan | Aug 30, 2005 12:07:42 AM: “So Republicans (borrow and spend) and Democrats (tax and spend) can share equally the blame for the government mess we’re in now. No need to get all partisan about it.”

    Hello? Recall when republicans begged for control of the white house & congress to stop the pork barrel spending? Well, they have it and spending has never been worse. And, Mr Bush has yet to veto a single spending as president. So, blame both parties for spending. I wonder what our children see & think……

  11. Larry Nusbaum, Scottsdale says:

    Please read these 5 rules:
    http://biz.yahoo.com/brn/050825/17207.html?.v=1

  12. Chad K says:

    Larry… possibly the reason why it’s always been better to have different parties controlling the different branches of government.

    I notice quite a bit more of the anecdotal evidence. There’s almost a direct correlation between pay-at-the-pump, debit cards and their usage. So here’s something to remember. Giving your PIN away for your debit card is very insecure. Using it as a credit card is safer for the consumer, not only for the fraud protection that Visa provides, but for the coverage by most banks. My former job was Data Security for a fairly large bank. Our company policy was that any fraudulent transactions would be refunded in a timely manner. However, if the transaction was with a Visa check card, you were guaranteed to get your money back in 1 to 2 business days if it was fraud done as a ‘Credit’ card… and 30-90 days for a ‘Debit’ transaction.

    So when they ask you “Credit or Debit”… just tell them credit. The merchants hate it because it costs about twice as much, but it’s in your best interest.

  13. Chad K says:

    I completely forgot my other two points…

    Consumer electronic sales. High-end gadjets have come down in price without much to replace them. In the past, Moore’s law kept new and more useful items in constant supply… but the law seems to be slowing (if only temporarily). The problem is that there’s too much pricing pressure on the gadjet sellers due to the time in the market for the items. Everyone willing to pay $10,000 for a plasma has likely already done so. In order to generate more sales, prices on items such as these had to come down. Laptop/Desktop computer technology has slowed it’s performance gains recently, and where a 4 year aged computer used to be a dinosaur 4 years ago… a 4 year old computer today works just fine for most people.

    point two:

    The consumer is slowing spending on nonessential items? This sounds good to me. Maybe we’ll all start paying of our credit cards now… stop financing our lives with debt and start living within our means.

  14. erikpupo says:

    Larry,

    The problem is that if Americans lived within their means, the economy would not be as “strong” as it is now. The strength of the economy is dependent on consumers wanting and consuming more and more in order to keep things going. This is the level of imbalance that AG is really trying to get at: how do we get out of a consumer debt problem like this without hurting the unerlying consumption that keeps the economy growing.

  15. erikpupo says:

    “I can’t understand what they are doing? I can’t understand why they are undermining the reserve status of the dollar. I can’t understand why Americans are spending spending spending while the jobs of the future will be going going going to the most educated in a world becoming ever more educated.”

    BECAUSE THEY ARE ABLE TO. As long as credit is available freely and there are weak consequences to misusing it, people will freely take the risk.

    Its the whole risk premium AG is talking about; people feel they will be bailed out in some way so what is the risk?

  16. Peaktalk says:

    CAUTION SETS IN

    Earlier today it was reported that US Consumer Confidence is up: Consumers reassured by the strengthening job market stayed optimistic in August despite the surging price of gasoline, giving a widely followed measure of consumer confidence an unexpecte…

  17. Craig says:

    I wasn’t trying to be partisan but this whole tax cut deficit spending kick started under Reagan with a Republican Senate and has lived until today with a minor dip during Clinton. The fed deficit has increase nearly 60% in 6 years.

    Check out zfacts.com. Watch the deficit increasing live. Now, when rates rise they will switch spending to paying interest on this vastly increased debt and will crowd out discretionary spending.

    We spend, now, nearly 4 times as much to service our debt at ultra low rates than we do on Education at the Federal level. When rates rise, debt service will surpass Defense spending. Might take large heaps out of DHHS and will most likely make the Social Security system in extreme crisis enabling a reduction in benefits acceptable to the US people. This will further take cash out of the system and who has benefited:

    MNC’s who built from borrowed moneys and subsidies that a dwindling middle class will somehow have to pay for.

    Look I am not a free trader. I do not believe in the superiority or rationality of the markets. I believe that growing income inequality worldwide is case and point that this immoral system has simply been created to transfer wealth into fewer and fewer hands. I do not believe that the benefits have outweighed the “deficits”. I believe they were engineered to impoverish and to create conditions for oppression. So know I am not partisan. But then it is easy to see where the deficits were created and who created them. Politicians are a spineless self serving lot. Our ability to reform is limited by the system our forefathers created. Laws are not easily changed. At the end of the day the American people have given over their long term fiscal health to finance the globalization of markets being told that this will lend to increases in quality of life. That might have been true were the American government have been able to control the system unabated for another 100 years into the future. Yet, considering our current fiscal health, it is unlikely thtat that will be the case. So we have squandered our nation for a few shiny trinkets.

  18. chad,

    Your argument makes little logical sense. Why the sudden switch from Cash or Debit to Credit — because a fill up costs $60 instead of $40?
    Where is the significance of higher gasoline in the change?

    You argument does not explain why people have changed their behavior.

    Debit is just as insecure for cheap gas as it is for dear gas.

  19. Larry Nusbaum, Scottsdale says:

    Posted by: erikpupo | Aug 30, 2005 11:51:05 AM
    Larry,
    The problem is that if Americans lived within their means, the economy would not be as “strong” as it is now. The strength of the economy is dependent on consumers wanting and consuming more and more in order to keep things going. This is the level of imbalance that AG is really trying to get at: how do we get out of a consumer debt problem like this without hurting the unerlying consumption that keeps the economy growing.
    =========================
    I submit that more people would participate in investement and therefore consumption, if their personal balance sheets were in better shape. I t also might help smooth out the wide swings in the cycle? For example, those with more investment dollars in real estate may pay no taxes at all (which is what the government wants), leaving more free funds available for consumption. Imagine the cost of goods and sevices if defaults and bankruptcies were removed from the pricing model? I am not an economist…..

  20. Larry Nusbaum, Scottsdale says:

    The key tell: we will have unequivocal confirmation that the consumer has finally exhausted themselves,
    from reading all of the storries of how tapped out they are and that the bubble is about to pop on everything.

  21. John Thacker says:

    Umm, I’ve been using a credit card to pay for gas more, but that’s because more gas stations offer pay at the pump, and I find it more convenient to pay at the pump. I never run a balance. I see no evidence from the story that “using a credit card to pay for gas” means actually running a balance on the card. Plus, several credit card companies are running specials on when you pay for gas using their card– for example, Discover Card has an option where you get a large 5% cashback bonus on gas purchases. It’s insane to use cash in those cases.

    And of course the other hook you based this on was the decrease in Consumer Confidence. Whoops. Up to 105.6 in August from 103.6 in July.

    BLR: As I have demonstrated repeatedly, the Conf Board data is garbage — stick with U Mich (Go Blue!)

    As to the sudden switch from Cash or Debit to Credit — because a fill up costs $60 instead of $40? Where is the significance of higher gasoline in the change?

    You argument does not explain why people have changed their behavior.
    Debit is just as insecure for cheap gas as it is for dear gas.

  22. erikpupo says:

    This new census report regarding income sure does not paint a reassuring picture of the consumer:

    http://www.census.gov/Press-Release/www/releases/archives/income_wealth/005647.html

    Real wage growth has remained flat.

  23. Larry Nusbaum, Scottsdale says:

    “Real wage growth has remained flat.”

    LOL. I have heard that since Nixon took us off the Gold standard in the 1973 or 1974 (Barry: help on the year)……Wage is not the only spending criteria anymore. We have been through the greatest period of wealth creation in the past 10 years than ever before. At least wealth creation opportunity period. And, that has bolstered the consumer. There is a fear that the consumer is tapped. But, I have also read studies that average family balance sheet has never been better……..
    ADVICE: DO NOT REFINANCE HIGH RATE CONSUMER DEBT WITH LOWER RATE HOME EQUITY LINES OF CREDIT, AS SO MANY HAVE SUGGESTED! That actually puts consumers at more risk than less. One is unsecured and the other is secured.