Thursday, October 25, 2007

For a Consumer Led Recession the Consumer has to Know They Have to Stop Spending

Home a little late, so this may be a bit shorter post than usual.

Thanks to the 76 people that voted in my previous poll. It seems the consensus out there is that in the face of a truly massive housing collapse the reason that we are not seeing the major economic indicators go down is due to the data itself being corrupt (51%). Hard to argue with that, as the New home Sales number was so manipulated, false, and compared month over month incorrectly, that it may not be a stretch to say that all official statistics may be subject to some massaging. I don't have anything to add on the silly New Home Sales number that was allegedly "up" month over month. It absolutely was not, and that will be clear next month. The Big Picture has about the best post on this news I have seen, so go check it out:

The Consumer May Not Know They Have to Stop Spending
I have spent some time, and tons of ink (old school term) has been spent all over trying to figure out how the US consumer just keeps on trucking in the face of horrible macro economic news. The housing bust is one component. Higher Oil prices and gas prices are another hit. Rapidly escalating food prices, health care costs, etc are all historically a bad omen for consumer spending. The unemployment numbers are so fraudulent, that is no longer a good data point as unemployment may be closer to 8% than the 4-5% reported. None of these factors has been able to cause much of a dent in consumer spending as of yet. It may in the future, or perhaps things will just chug along as is.

I heard a thing on the radio today during another protracted drive home from work that got me thinking. The talk radio host said that when he was younger the sign of the "middle class" was that those folks did not live paycheck to paycheck. Contrast that with the "middle class" of today and you see a big difference he said. I am only 32 and I came from what could only be called a "poor" family so I am not so sure about what was the case in the recent past. I can say that now most people I know are indeed in a paycheck to paycheck situation. The old standard of 6 months of living expenses saved up is probably nonexistent for 80% of the population today. My special thanks to the biotech bubble of 2000, that's not the case for me.

I had equated the US consumer to a old tech /Internet stock from the Nasdaq boom of the late 1990's to the 2000 bust in a post here:
I stated that the US consumer is "priced to perfection" in the sense that basically all of their income is spent paying into the monthly payment game for a house, car, child care, insurance, etc. Sadly, this mentality is a way of life. The savings rate has been negative for quite some time now, and nothing points to a turnaround. The accumulation of debt is another new staple of the middle class.

And with that point in mind the reason a recession in consumer spending is slow to come about, or may not happen at all, is because the consumer has no idea that they need to save money. I know, it sounds stupid and simple. A person that lives paycheck to paycheck does not have the ability to slow spending. They cannot look ahead and see that a job loss, health issue, or a divorce may cause an income disruption. Even if they are aware they need to save, the monthly payment syndrome stops them from being able to change their spending habits. In this way, consumer spending has been surprisingly "resilient" in the face of the 9/11 terror attacks, a home price bust, record foreclosures, rising unemployment, and skyrocketing prices in things they need. Debt is no longer a dirty word, and in fact is looked at as a way to extend finance long term, not just short term. I believe the consumer is not saving money and thus causing a consumer led recession because they are not aware that they need to save money.

Obviously at some point the consumer is going to be overextended and break. Where might that point be? Bankruptcies are rising at a rapid pace, but that helps consumers get a new start on another paycheck to paycheck life, this time with fresh credit. It is hard for me to see a way that the consumer will pull back on spending unless absolutely forced to do so.

If credit becomes harder to come by, then yes a spending collapse could occur. While mortgage credit is indeed tougher to come by all of a sudden, all other debt instruments are fully at the consumer disposal. News reports of 401k raiding at an all time high is another well for the consumer to tap into.

In summary, the housing bust is real, it is here, and it is not going anywhere. A consumer spending collapse and thus a real recession is not in the works as of yet. Looking forward, massive ongoing losses at the banks have a chance to cause a credit crunch. The crunch needed to stop the consumer would have to be very severe. In a credit crunch scenario in business, money is made available by the FED to be loaned out, but companies do not want to take on loans because conditions are unfavorable for future prospects. The US consumer has no such qualms, and as long as the debt is available, they will take it on.

Please take a moment to vote in the new poll, it will help me understand how much this blog is read and whether it is useful.

Have a good night.


brokenotbroken said...

I can't remember where I read it, but I remember someone saying that one of the main reasons people get into financial difficulties is because they don't change their spending habits quickly enough when their financial situation changes. I also believe that most people have no clue as to where their money goes--they either don't have a budget or they don't live within their budget. Finally, I also believe that it is extremely hard for people to lower their standard of living. If I put these three traits together I can easily see why the US consumer is "resilient." They'll be resilient until everything is depleted, and to me that's the scary thing.

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