Are consumers back from the dead?

Over the last few decades Americans have sustained their standard of living in the face of declining real income by borrowing more and more. Consumer spending reached a level that was unsustainable. This has occurred as the US economy has lost millions of manufacturing jobs. Consumer spending cannot return to 2006-2007 unless real incomes rise. That will only happen if the US can bring back manufacturing jobs from overseas.

I have no plans to increase spending, either in the near future or long term. In fact I am working to structurally change my lifestyle so that I won’t need to spend as much in the future.

Michael Bolduc said:

“This country was built by innovation, ambition, hard work, sacrifice, and responsible living, not by credit cards, seniority, scams, and entitlement. If we forget that, we’re in a lot of trouble.”

I guess that means we are in a lot of trouble.

Lisa’s question is, I feel, the most pertinent. Any person with some common sense can understand that to have 2/3 of economic activity generated by consumer spending is not a long term plan for prosperity.

In the near future perhaps the switch to “green collar” infrastructure and jobs can pick up some of the slack. Medium term there needs to be a fundamental shift in economic drivers. What that could be is anyones’s guess.

We are in a cycle. Deflation is driving people who have buying power to snatch up good deals because there is an excess of inventory. Most manufacturers are contracted 12 to 18 months before their goods hit the shelves. Problem is, there has been an almost halt to production worldwide in the last 10 months as indicated by the LIBOR. Once excess inventory is worked through the system, we will be looking at lower supply and higher prices.

Am I seeing more confidence in the economy? It’s up for quite a number of days. But, I keep looking for why. Some reports say the banks are better, and then some say more the contrary and there is more bad news to come.

The bottom line is I want to believe our economy is improving. Yet, there is still a lot of misery out there. And, our government is spending money in the trillions of dollars, resulting in an amazing amount of debt. Sooner or later, we will see what the costs are.

Also, one of the permanent changes to come out of this downturn is I don’t trust the big banking institutions or Wall Street. And, they are the money people who generate news that we are getting better.

We might be showing some signs of improvement, but how stable is the economy?

It is absurd that the author suggests consumer spending must increase, and when it does, the economy will somehow recover.

If you look at historic consumer spending in the US, as well as current consumer spending in other countries; a sustainable level of consumer spending as a percentage of GDP is about 55%-65%, not the 70% seen recently. Most consumer goods are imported and sales offer little value to the US economy.

The cause of this recession, as well as other recessions and the great depression; is more complex, but a lack of business investment is a big factor. Consumer spending has a minimal impact.

It will take households 5-10 years to pay down their excess debt and start spending again. This process will be lengthened by bankruptcy reform and recent abuses by credit card issuers. When they return to the stores, they will be cautious and expect deals.

When Paul losses his confident, it is time to buy… that is what I have learned during the past several months/years…Nothing to against you, Paul.

My company stopped 401K matching this year. But I have managed to catch up by jumping into the market earlier this year.

The confidence of the consumer has been shaken and shaken to the point that it has been changed forever. The real plight of the average American has been left to the average American to get themselves out of their own mess. A bitter pill to have swallowed, but spending by consumers to drive the eonomy going forward, for necessities perhaps, but living beyond their means, this was changed for good.

You see, here’s the thing,

Any ****real**** recovery can ****not**** be led by consumer spending.

Consumer spending can augment an economy. But it does not constitute one. Same with banking, investing and even preaching.

I will have confidence in the economy when at least 50% of it is making/building/grown real things.

I’m feeling somwhat more confident in the economy. The economy can’t stay down forever. Our recession has been going for almost 2 years. Secondly, the government seems to have less need to rescue everyone from the economy. In other words, they’re letting the people who know what to do take over and drive for a change. The less government interference, the better.

Seems like everyone who visits the CNN site is relatively adept at understanding basic economics and living fiscally responsible lifestyles. So where are all the idiots who are polishing up their credit cards in the hopes of an imminent recovery? I’m always curious as to the average age of the people who write into this site as I’ve always believed there is a generational perspective to consumer confidence and spending. Think of a fifty or sixty year old baby boomer who bought a house in the seventies or early eighties for $40K or $50K and who believes current home prices are affordable. Now talk to someone in their twenties or thirties who has to shell out $250K or $3000K for the same house. Think they have the same opinion? Compare someone relying on a pension and social security for retirement to a younger worker who has to put 10% of their salary into a 401K and believes social security will be bust by the time they retire. Don’t forget about saving for your kid’s college education which has gone up 400% over the last twenty years. Add on student loans, healthcare premiums, and other costs that keep going up. Start to wonder if the rising consumer confidence applies only to one generation? I’d be confident too if I didn’t mind my kids and grandkids picking up the tab for my spending. It’s a good thing Mr. Obama has realized that and isn’t doing anything irresponsible by say, leveraging the future of the country so one generation can keep the party going. There is no and will be no legitimate economic recovery until everyone can participate in the game. Make housing affordable for everyone, not just the people who got here first. If the government wants to borrow money, put it towards education and job training to build an infrastructure for a strong future economy, not toward handouts and entitlement programs. Most of all, abolish the “look at me – I look rich but I’m in debt up to my eyeballs” culture and start living within your means. This country was built by innovation, ambition, hard work, sacrifice, and responsible living, not by credit cards, seniority, scams, and entitlement. If we forget that, we’re in a lot of trouble.

Heck no the consumer is not back from the dead. Job losses are still running about 600,000 a month. If you were lucky and you didn’t lose your job, you probably had a salary cut, wage feeze or work hours reduced. If you were laid off, the uncertainty faced by small business means that they are not likely to start hiring again anytime soon.
You have no equity left in your house to borrow against and your credit card limits have been cut. The gain last quarter is likely attributable to redemption of holiday gift cards, an $80 billion dollar business, sold in November and December and redeemed in January and February.

I don’t have access to the numbers behind the numbers, but somehow it appears the Emperor or somebody is once again without clothes.

For the quarter, consumer spending is up 2% and presumably Gov’t spending is also up and yet GDP is down 6%. Can business spending actually be down enough to offset the increases in both C and G and also cause GDP to be down 6%???

Also, employment and income are down and consumer saving is reported up and yet consumer spending is also up???

Does anybody else smell something fishy here or perhaps a statistical anomaly?

Is this due to deflating gas/energy prices temporarily skewing the data? Or consumers spending temporary tax cuts (for example $8,000 on a new home purchase)? I have about as much faith in these numbers as I do in the Banks’ fishy profits reported in the first quarter.

Paul on Will the economy ‘double dip’?
April 2, 2009 1:02 pm articale you knew that we will have a false recovery. We are beginning to see that now as all the fresh new printed money coming from the fed is hitting the streets. But we are not fooled, we know this money was just printed out of thin air and when the hyper inflation hits, this economy will tank, making Jimmy carter’s inflation look like pre-school.

I think the housing market has hit bottom and that the events for the auto industry have been factored into peoples minds( we know major downsizing is coming).

I have been steadily spending because if everyone just stops spending then theirs will be the next job that goes. We never lived beyond our means to begin with so we do not have a lot of debt to pay down. I was very encouraged by President Obama’s press release about changing the tax laws to stop encouraging companies to create jobs off shore. It’s all about jobs, if people have them they feel better and if people stop losing their jobs consumers feel better.

In order to increase spending, consumers need one or more growing sources of cash. Real income from employment has been declining for at least a decade, home ownership is no longer an investment with a positive return, dividends have largely disappeared, interest on savings is effectively zero, and borrowing is both difficult and expensive. The only upside available in the private sector is the stock market. Given the irrational optimism of many Americans, I’m not surprised they are bidding up the notional value of the only game in town.

As others have noted, the primary driver these days is government in the form of tax refunds and stimulus packages, both of which run the country deeper into debt. I’m with Buffett – the only out is inflating away the mounting debt and further reducing the American standard of living to bring it in line with what the global market supports.

The bottom line is that no amount of financial or political wizardry can maintain the American standard of living above its global equilibrium level. You can’t consume what you don’t earn forever.

I don’t feel good about our economy here are my reasons. I own a used car lot,my sales have been down 60% the last two months. The dealer auctions have less inventory to chose from,they look to be down 50% to 65% themselves. If new car sales don’t pick up to 2006 or 07 levels then we can expect more bankruptcies. About 10% of our employment comes from new car sales in this country. That means we better start selling some new cars or you can add about 1 million jobs lost every percent lost of the 10% that new car sales employs.

well if consumers are back from the death now. great. all i will have to do is stay short REITs for no more than 2 years (while keep adding on dips) and wait until the ultimate collapse occurs. if now some people think S&P 450 is a bottom, how does S&P 50 sound? no other solution here but for consumers to ramp-up saving to 10%-15% at least and repay their enormous debt. and if they can’t do it well i think the whole country will go bankrupt at the time the next crazy bubble ends (2-year tops from bubble to pop now as money creation has lower and lower real effects)….

HOw can you be confident when out of work, no insurance and bills piling up? I know other out of work folks but those who still have jobs, don’t feel like flinging money either. I don’t think seeing the stock market rally does much for people still laying on the RR tracks…

I basically view this market as being on crack. There is no way the economy has bottomed yet. Housing prices continue to go down, unemployment continue to increase. Chrysler has closed most of it’s factory while in bankruptcy, GM will close most of it’s factory for 11 weeks this summer, that will mean countless auto suppliers and dealer will close and a lot more unemployment.

I will not start spending more for a long long time. Consumption will stabilize but at a reduced level. People will buy what they need, not what they think they want. A lot of people are paying down their debts. A lot of people will never again invest in the Casino Stock Market. So who is pumping this market, I suspect brokers are selling each other the same stocks and inflating price to lure back people in their Ponzi scheme.

This is too early, too high and too fast, welcome to the new stock bubble of 2009.

The key is multi-fold.
1)We need to be building MUCH fewer homes.
2)Home buying must continue to increase.
3)Lastly, regular consumer spending needs to pick up.
Keeping in mind that the US consumer may never go back to their pre-meltdown levels.
Q: As habits shift from over-consumerism to a more fiscally responsible consumerism, how will that change the overall dynamics of the economy? For example, will consumer spending REMAIN 2/3 of the economy? If not, then what will replace it?

Yes, the main reason was delayed Easter !. One expect better data. Sustainability of this data will be left to the employment seanerio.

I would only add to FrugalPete’s comments. We have spent the future and the home refinancing ATM machine is closed. Where’e the demand going to come from if the consumer has been buying and living beyond his means for so long ? You can only buy so many houses, so many gas guzzling vehicles, so many vacations, etc. After that demand drys up…we have bought the future and the future is here. The only thing giving any semblance/illusion of an economic recovery is the government spending on bailouts and stimulus and that is not sustainable.

I will resume spending BUT not under the ‘reckless’ debt-fueled spending model of the past. I will buy what I need and pay for it within the next billing cycle of my credit card. I will NOT buy what I want and let it sit on my credit card balance sheet generating obscene levels of interest going to the banks.

Mind boggling. How it possible that even though real wages have been falling for years, companies are downsizing or closing their doors altogether, major lay-offs and/or shutdowns are announced almost daily, permanent un-employment is a real possibility for large numbers of the working age population, etc, that people can continue to spend money going forward? I just don’t get it and I surely don’t believe it either. The current stock market is running on hope of a fast recovery but where is that recovery coming from? Car manufacturing operations are going to kill many, many support companies that feed into the major manufacturers thus causing a big ripple effect of unemployment as the year progresses, so again HOW can people continue to spend money under the cloud of higher unemployment as the year progresses.

People need to wake up and realize that we are facing down the barrel of a long term downturn in our economy, exacerbated by the huge government bailout interventions thus far. All these financial problems are not going to go away overnight or in a couple of weeks or months. We are looking at YEARS and YEARS worth of hard times ahead. All this business of a quick recovery are all HOPE and HYPE and a load of crap.

This is NOT going to end quickly or well any time soon, I’m afraid to say.

Things are getting better but I’m still cautious. I’m definately looking for a deal before I’m willing to make a purchase. My fiance lost his Job in February. I won’t really feel better until he’s employed again.

More confident in the economy now but still cautious on spending. My fear is all those who abuse credit will fall back into the same old routine and we will dig a bigger hole then ever.

Hopefully the new economy will have a basis on something like 40 percent consumer spending rather then 70 percent which has proven to be a formula for disaster.

Consumers do need to spend, without going nuts as has happened in the recent past. Cut up those credit cards and forget about refinancing with a focus on living within our means. More stuff does not make one happier.

If we the consumers will make better choices then our economy will come out of this much stronger, if not duck , this is just the first of many nasty recessions.

The economy is really not that bad. consumer spending may have dropped 4% for a quarter or two, but it will recover quickly. Business spending dropped 50 – 100% when they panicked in Q4 of last year; this is collapse, and it will take longer to recover. Many businesses made very bad decisions during the bubble. In the mean time, government spending will fill this gap, and it must.

I will increase spending when it makes sense, and I hope others do the same.

As far as the stress tests go, Bernanke and Buffet have already stated in the media that NO BIG BANK will be allowed to fail! That being the case, what’s the point of the tests? Even if they fail the test the government won’t let them fold. It’s all smoke and mirrors to divert attention. No extra spending here, NO JOBS, NO RECOVERY, NO GOOD FEELINGS ABOUT THE ECONOMY! Keep your eyes on the auto industry the next two months, that will tell you plenty.

A funny thing happens in the first quarter every year, especially late February into March – people fill out paperwork and get money back from the government in the form of tax return overpayment checks… When people get that money, they inevitably spend it.

Given that unemployment was up and capital losses were also up, I would expect tax refunds to be up as well – that should translate into increased consumer spending. Once the tax refunds are spent, I would expect people’s consumption to drop as well, at least until unemployment improves.