Not this time, though. "The consumer is retrenching, bigtime," says Richard Hastings, economic adviser to the Federation of Credit & Financial Professionals. "It's starting to get to the point where people are achieving levels of debt that are getting uncomfortable."

The question, though, is just how much consumers will restrain their free-spending ways. Research by economist Carroll suggests that every $1 decline in house prices lops about 9 cents off of spending. The current value of residential housing is about $21 trillion, according to the Federal Reserve. So if home prices fall by 10%, as many people expect, that would lead to roughly a $200 billion hit to spending over the next couple of years. A 15% tumble in home prices would produce a $300 billion pullback in spending, or about 3% of personal income.

That accords well with calculations by BEA economists. They figure that households took out $340 billion in cash from mortgage and home-equity financing in 2006. That source of funding could largely disappear over the next couple of years.

Story continues below ↓

advertisement | your ad here

Three percent — that doesn't sound like a lot. Look a little closer, though, and it's a bigger hit than it seems. The reason is that much of what the government counts as consumer spending is not directly controlled by households. For example, the $1.7 trillion in medical costs is counted as consumer spending, but 85% of that is spent by the government and health insurers, not individuals. And $1.5 trillion in "housing services" is listed as part of consumer spending, but for homeowners it really just represents the value of living in a home rather than any spending they can change. It's mainly a bookkeeping convention, not a real outlay.

So that 2%-3% decline in income directly hits the wallet and the discretionary purchases that households actually control. One logical place for cutbacks is apparel. Autos will be hit. Another target could be luxury items, a surprisingly big part of discretionary spending. Pamela N. Danziger, president of Unity Marketing in Stevens, Pa., conducts a quarterly online survey of adults earning $75,000 a year and up. She found that people who make more than $150,000 have been unaffected, but the rest are cutting back on luxury goods such as fashion accessories. "They are taking a very cautious attitude," says Danziger.

A lift from exports
Will the consumer crunch spread to the rest of the economy? Conventional wisdom is that consumer spending makes up 70% of gross domestic product. While technically true, that figure is deceptive, because so much of what Americans buy these days is made overseas. Compared with the early 1980s, which was the last time consumers cut back, much more of what Americans buy is made abroad. Today, imports of consumer goods and autos run about $740 billion a year. That's fully one-third of consumer spending on goods outside of food and energy. As a result, most of the spending cutbacks won't cost Americans their factory jobs — those factory jobs have mostly fled offshore anyway. Workshop China, in contrast, will get hurt.

What's more, it's still a low-rate world for most nonfinancial corporations, which have access to relatively cheap funds for expansion and capital investment. Asia and Europe are continuing to expand, with German and French growth accelerating in the third quarter. Exports of aircraft and other big items are likely to rise, too, supplying the U.S. economy with an extra lift. In other words, globalization has made consumers less central to the American economy.

Still, the consumer recession will hit some parts of the economy harder than others. Particularly at risk are retailers, who have already seen sharp declines in their stock prices since the extent of the subprime crisis became clear. Nordstrom shares, for example, fell from 52 in September to as low as 32 before rebounding. On Nov. 14, Macy's cut its sales forecast for the fourth quarter, sending its stock down to $28 a share from $43 in July. "Retailers are looking to pare inventories," says Rosenberg.

Not everyone thinks American shoppers are tapped out. Consumers have about $4 trillion in unused borrowing capacity on their credit cards, enough to keep spending afloat, points out Stuart A. Feldstein, president of SMR Research in Hackettstown, N.J., which studies consumer loan markets.

But executives from Capital One Financial, Bank of America, Discover Card, Washington Mutual, and others have told investors in recent conference calls that they are using more caution in extending credit. Chief Financial Officer Gary L. Perlin of Capital One, the nation's No. 5 card issuer, says he believes last year's historically low defaults by credit-card holders were partly driven by the real estate boom, particularly in previously hot housing markets such as Arizona, California, and Florida. Those benefits also have seemed to run out. As a result, says Perlin, Capital One is tightening lending standards and limiting credit lines.

More rate cuts by the Fed can cushion the impact of the consumer cutbacks but not avert them altogether. It's best to think of this as the end of a long-term spending and borrowing bubble, where the role of policy is to keep the inevitable adjustment from turning into panic. "The Fed's job is to keep us all calm and reasoned," says Carroll.

Everyone now seems to be coming up with remedies. At a Nov. 8 congressional hearing, Fed Chairman Ben Bernanke suggested legislation that would temporarily add liquidity to the jumbo loan market. And the possibility of a consumer slump already has Presidential candidates and their staffs looking ahead. "Potentially, the next subprime crisis is the issue of credit-card debt," says Austan D. Goolsbee, economic adviser to Democratic hopeful Barack Obama and a professor at the University of Chicago Graduate School of Business. The Illinois senator's view, says Goolsbee, is that the U.S. needs to improve oversight in the credit-card market. Republican candidate Mitt Romney suggests eliminating taxes on savings and investment by low- and middle-class families, a move that could help make up for a tougher credit environment.

The politicians can say what they want. Recession or no, Americans had better get ready to tighten their belts.

< Prev | 1 | 2

Discuss Story On Newsvine
Rate Story:
View popularLowHigh
Email
Instant Message
Print