Earn What You Spend

In yesterday’s NYTimes, David Leonhardt has one of the best articles about the slowdown in consumer spending I have read.  It is pretty widely agreed that this slowdown is one of the more serious challenges currently facing our economy - with consumer spending making up two-thirds of our economy, every drop in total consumer spending has far-reaching implications.  David notes “the American consumer, long the spender of last resort for the global economy, may finally be spent.”  That is an incredible statement. 

Consumer spending growth has halted.  And if you look at those years this has been true, we are not in good company: 

Source: NYTimes

So why are American consumers, who have historically been resilient, big spenders, finally pulling back?  In short, we’ve lived beyond our means.  But David elaborates on a few key points:  

• The job market is terrible. Unemployment is high and rising; incomes have not only not kept pace with inflation, they are now falling
• “Americans spent about 91 percent of their income, on average, and put away the rest. In the last few years, they have spent close to 99 percent and saved only about 1 percent.”  This is untenable. 
• Even if consumer spending only drops 1% next year, “Relative to the typical increases from recent years, it would represent $400 billion in lost consumer spending.”

The job market is indeed bad.  Jobless claims just hit 7-year highs. 

And this phenomenon has the attention of the Fed:

Treasury is growing concerned about consumer access to credit, which has come under pressure amid the recent financial turmoil. Consumer spending is a key component of economic growth, yet access to credit — for cars, homes, and various installment loans — has all but dried up.

I feel the last thing the American consumer needs is more access to credit - we’re already maxed out. When American Express becomes a bank, you know things are bad.