Consumers Tightening Belts, Raising Worries About Recovery

There is a not-too-bad article up at the Wall Street Journal on how consumers have hunkered down and are unlikely to resume their freespending ways any time soon. Even though it has useful on the ground observations about the new consumer austerity, it repeats the oft-repeated tidbit that consumer spending is 70% of the economy.

Make that “was”. 70% (depending on the metric used, it could be 71% or 72%) was not sustainable. Some of the cutback is due to worries about the economy. Even though the article does mention that consumers are starting on what may be “a prolonged period of thrift” no where does the article acknowledge that the consumption level was unsustainable and debt fueled. We are in the midst of a secular change, not merely a prolonged recession responses.

From the Wall Street Journal:

Major retailers reported that American consumers are continuing to hunker down, casting a cloud over the durability of the U.S. recovery and underscoring the importance of overseas demand in restoring the world economy to health.

Retailers across the spectrum provided foreboding reports. Discounter Target Corp. reported that sales at stores open at least a year were down 6.2% from a year earlier in the quarter ended Aug. 1, while luxury purveyor Saks Inc. reported a 15.5% drop in same-store sales over the past quarter as shoppers stuck to buying basics. Building-supply chain Home Depot Inc. saw total sales drop 9.1% in the quarter ending Aug. 2, and it reaffirmed expectations of a 9% sales drop this year.

A cashier at Target in Los Angeles checks the authenticity of $100 bills. Some retailers don’t expect conditions to improve until next spring…

American consumers appear so shaken by the worst recession since the Great Depression — and so pinched by unemployment, stagnant wages and stingier lenders — that they are reining in spending on all but basics. Economists also see an upturn in U.S. household saving as the beginning of a prolonged period of thrift…..

Most economists expect growth to resume in the second half of this year at a modest pace, as U.S. businesses rebuild depleted inventories and the housing market stabilizes. Economists who see a second-half rebound point to a global-manufacturing revival and recent reports that the economies of France, Germany and Japan managed to expand in the second quarter. The Commerce Department said earlier this month that U.S. exports in June rose 1.9% from May after rising 1.6% the month before.

But U.S. consumers could be the counterweight. In a survey of economists this month, The Wall Street Journal asked if a substantial increase in consumer spending was needed for sustained growth. Of the 43 economists who responded, 60% said yes….

Earlier this week, the Federal Reserve said a July survey of banks found continued tightening of lending standards as well as a diminished appetite for borrowing among consumers. About a third of banks said they tightened lending standards on credit cards and other consumer loans since April. No banks reported relaxing them.

Print Friendly, PDF & Email


  1. pigeon

    Some time ago CalculatedRisk had some graphs on the savings rate combined with mortgage equity withdrawals. The conclusion then was, that a large part of the perceived rise in the savings rate was due to the closing of the home ATM. Since other lines of credit tighten too and unemployments rises, I concluded that there still isn't a change in US consumers mentality towards true frugality visible. They simply do not have the credit available to spend more. If they had, they probably would resume spending(which for me as a thrifty german is totally beyond comprehension). So in my opinion the question of whether we see a secular change in consumption or just a unavoidable reaction to the recession at this point cannot be answered.

  2. biofuel

    Accrued Interest had a post on this ( and pointed properly IMHO that different slices of the consumer have been hit to a different extent. Provided the stock market remains afloat and bank bailouts and such continue, the top 10% of the consumer, which are responsible for 42% of consumption, may cut a bit but overall be just fine. The bottom 40%, which consume 12% of the pie, wouldn't be able to cut much further. It is the middle 50% portion of the consumer that might need to join the ranks of those on the bottom.

    Accrued Interest suggests that investors should take a look at businesses dealing in luxury goods. Sounds reasonable and, if such investment takes hold, it would mean that the economy might restructure more toward servicing the wealthy. Anyone would like to apply for a position of butler….

  3. Richard

    I know he is a crazy left-wing economist, but Dean Baker was writing both on his blog "Beat the Press" and on the CEPR web site in 2006 that when the 8 trillion dollar housing bubble burst there would be a massive reduction of consumer spending in reaction to this lost of paper wealth, that he calculated would mean a 500 billion dollar reduction in annual consumption. With the loss of so much paper wealth, and nearing their retirement years, boomers would begin to frantically save and deleverage (the fancy word for paying off debt).

    To my German friend, I need to introduce you to Herbert Stein's rule: "If something can't go on forever, it won't." The lines of rising consumption and debt and flat income had to cross at some point. Except for the upper 1%, where all the income gains of the last decade have gone, the American middle class can no longer service the debts they already have and can't take on any more. The anger you see righ now in the town meetings is a manifestation of that many realize how perlious their individual situation is: they are one lost job or serious illness away from penury.

    An interesting anedoctal story yesterday in the Washington Post about one family's fall from upper middle class to poverty in just three years when they found themselves in debt to their eyeballs as their income fell due to illness and the economy. From owning three homes and small business to living in a one room apartment above the garage and behind on the rent. It is not Dicksenian poverty we are falling into (since after all even for the poor the world is immensely richer now than it was in 1845): rather, think of "Blade Runner" and Philip K. Dick's vision of the near future.

  4. Donlast

    The data being deployed to argue for a positive H2, the "statistical recovery" is meaningles. It no more tells you what lies ahead than white lines in a road tell which way you are heading.

  5. Anonymous

    To my German friend, I need to introduce you to Herbert Stein's rule: "If something can't go on forever, it won't."

    Stein's formulation was long anticipated by the old German proverb: "The trees don't grow up to the sky."

  6. Siggy

    The house price reductions coupled with the decline in the stock market have created a very important need for a very large segment of the population. The 'baby-boom' generation has incurred a subtantial reduction in net worth and its ability to retire has been impaired. If they want to retire at all, they are going to have to either retire with less; or, they are going to have to save at a very high rate.

    Now, hidden in the statistics is the fact, pointed out here, that easy borrowing is history and for that reason there is a notable increase in saving. This leads us to what do you want? Do you want to continue to keep spending in excess of your earnings? Or, do you want accet the fact that you have very limited resources and must save a substantial portion of earnings for future consumption?

  7. Anonymous

    What is going through the minds of Congressmen (other than coke and visions of naked congressional pages)? What nagging thoughts hamper Bernanke's sleep? Why is Geithner unable to concentrate on his putts?

    They can't figure out why the economy still sucks. "Gee," they think, "we gave hundreds and hundreds of billions to the banks and all the rich people. Why isn't this thing turning around?"

    Actually, I doubt they even think that. They probably think "Well, fuck the poor. WE and our and friends on Wall Street are doing just fine thanks. Don't these ingrates realize we could simply ship in a bunch of Mexicans to replace them if they get too whiny!"

    When we all agree to burn down Washington and Wall Street, call me. I'll bring my lighter and some gasoline.


  8. Voice of Indignation

    The low or negative savings rate will be more comprehensible when you realize that it doesn't make sense to save during periods of high inflation.

  9. Siggy

    It is not a matter of when it does not make sense to save. It is a fact that it has not made sense to save for at least the past the past 38 years.

    I mark 1971 as the official starting point of the rapid erosion of the purchasing power of the Dollar. There have been accelerants added along the way such as the repeal of Glass-Steagell and the refusal to regulate derivatives, yet at its core the problem comes to the fact that the Dollar has not had the capability to function as a store of value since that time.

    The inducement to save is driven by the implicit contract that the money supply will not be inflated to accomodate deficit spending.

    Wars tend to make the problem rather clear in that the government invested in things that go poof rather than social goods that support production.

    For example, Defense Dollars were spent on producing large scale intergrated circuits for use in missle warheads. That research ultimately led to the personal computer. However, LSI chips were imbedded in missle warheads for at least 10 years before we had our first personal computer.

    There was a project called the Semiconducting Super Collider being built south of Dallas/Ft. Worth. That project was scrapped by the Congress and the money that it might have required went somewhere else. Now over in Switzerland at its border with France there is the Large Hadron Collider. A couple of billion dollars has been spent and a very large community of physicists have convened to search for the Higs Boson. The money being spent there will not produce economic benefits for some years to come, but the benefits will come, but there will be very important benefits, quite possibly with respect to clean renewable energy. That is the sort of investment we need to be persuing as a nation.

Comments are closed.