Consumer Spending May Actually Be Dropping

The New York Times says that rather than slowing, consumer spending may actually be dropping, and that’s not good.

There are mounting anecdotal signs that beginning in December Americans cut back significantly on personal consumption, which accounts for 70 percent of the economy.

A raft of consumer companies — high-end stores like Nordstrom and Tiffany, and middle-of-the-road ones like Target and J. C. Penney — reported a pronounced slowdown in growth last month, and in several cases an outright drop in business.

American Express said that starting in early December the growth in the rate of spending by its 52 million cardholders, a generally affluent group of consumers, fell 3 percentage points, from 13 percent to 10 percent, the first slowdown since the 2001 recession.

And consumer confidence, an important barometer of economic health, has plunged. Andrew Kohut, president of the Pew Research Center, says consumer satisfaction with the economy has reached a 15-year low, according to the firm’s polling.

Even wealthier consumers, who were seen as invulnerable to rising gasoline prices and falling home values, are feeling the squeeze.

“People are clearly concerned that we are headed into a recession,” said Stephen I. Sadove, the chief executive of Saks Fifth Avenue, the upscale department store whose runaway growth throughout much of the year slowed markedly in December.

Consumer spending slowed, but didn’t drop during the 2001 recession. The NYT says you’d have to go back to 1980 to find an instance in which consumer spending dropped in an election year.

Even in tough economic times Americans rarely reduce their consumption, preferring instead to slow the growth in their spending. Since 1980, they have cut spending in only five quarters — a total of 15 months — most of them in the depths of a recession. The 2001 recession passed without a cutback in consumer spending.

Only once before, in 1980, did consumer spending fall during a presidential election year, helping Ronald Reagan in his campaign against Jimmy Carter, the Democratic incumbent.

Americans Cut Back Sharply on Spending [NYT] (Thanks, Molly!)
(Photo:Ben Popken)

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  1. darkened says:

    I wonder if the decline in spending is tied to the no get out of jail free bankruptcy card anymore.

  2. esqdork says:

    @darkened: You’re assuming that people can plan ahead and are aware of the possible consequences of living beyond their means. I think what’s going on is that it’s a lot harder to cash out home equity like an ATM to buy the newest Gucci bag and Lexis SUV. I also suspect that the tightening credit markets are affecting the credit line available on revolving credit cards.

  3. Or the rise in gas prices or the fact that everything we buy lately is filled with poison or everything else malfunctions enough to cause injuries…

    Yeah, i can’t imagine why people aren’t buying enough.

  4. Trai_Dep says:

    OMG. The terrorists have won!

    Darkened: yeah, those spend-thrift waste-abouts that foolishly spend money when they encounter a life-threatening health-care crisis (which are the source of over half the US personal bankruptcies). Whatta bunch on wastrels!

  5. noquarter says:

    @trai_dep: No, I have it on good authority from other commenters around these parts that anyone can afford anything they need as long as they cancel their cable and live within their means. Did you not get the memo about that?

  6. warf0x0r says:

    @noquarter: Yeah, I agree. I spend roughly 656,427 dollars on cable a year so If I were to cancel my subscription that might be enough to cover the cost of a serious medical injury if I were hospitalized for upto one week… more than one week and I’d have to cancel satelite radio which costs me about 120k a year.

  7. bohemian says:

    Our health insurance went up by over $200 a month at the first of the year but wages didn’t. We also didn’t get a rather considerable year end bonus because the company changed their minds. Gas is stuck at $3 a gallon and food is much higher than it used to be. Add to that nothing optional that either of us really feel we just have to have.

  8. chili_dog says:

    Perhaps the real drop in spending is the fact that with the creep in pricing now there is less for savings. So since I do live within my means I have less to put away for a rainy day, I have reduced spending. Hummmm what a novel idea.

  9. headon says:

    @TRAI_DEP: No that’s the excuse they use the real truth is they overspent what they could afford to pay for.

  10. ARP says:

    It’s a few conditions combining:

    1) With high fuel costs, come higher food costs, which leaves less money to buy other things. The rise in these costs is significant enough to cut into discretionary income, but not enough to cause people to change their habits (yet).

    2) Real estate values and credit crunch has caused those who financed they lifestyle through home equity loans, to stop spending.

    3) For credit spenders, we’re getting close to maxing out how much we can finance via credit cards [har har]

    4) General geopolitical uncertainity will cause some to be more thrifty, even if there’s no real threat.

    5) Bush telling us to “go shopping” to help our troops doesn’t work as well as it used to.

    BTW- the picture is perfect. All the bad of America embodied.

  11. kimsama says:

    Yes, I am so glad that now is when my 11-year-old car is starting to fail. Hopefully the lagging sales and low consumer confidence will equate to good prices on big-ticket items.

    @noquarter: We should all cancel cable so we can afford Recessions. And by that, I mean the hilariously named dive bar on 17th and L (you’re from DC, right?)

  12. kimsama says:

    ?

  13. Rectilinear Propagation says:

    The drought certainly isn’t helping things in the Southeast.

    There are plenty of recession naysayers. Average hourly wages and salaries have not fallen, and some economists argue that unless – or until – that happens, consumer spending will hold up despite widespread economic unease.

    Doesn’t the rising cost of everything have the same effect as cutting someone’s pay? Either way your money doesn’t buy as much as it used to.

    Every time I go to the grocery store I see at least one person standing in front of the milk who is pissed off by the rise in prices.

  14. bbbici says:

    It’s great that people are buying less stuff. However, we must replace the material economy with the service economy. Shine your shoes, gov’nor?

  15. ElizabethD says:

    A flaw in the capitalist model?

    I am proud to be among those who has cut back (permanently, I hope) on spending. We have actually been getting *rid* of stuff via eBay, Craigslist, Freecyle, and other forms of donation and disposal. We moved to a much smaller house and enjoy the freedom of fewer possessions and luxuries.

    How will the economy adapt to this trend? Is it robust and nimble enough to find other growth catalysts than consumer spending? Or does everything rest on that base? (I never took an econ class; sorry for being an ignorant humanist!)

    PS I will charitably assume you weren’t being snide in using a pic of a chubby woman to illustrate this entry.

  16. Mariajl says:

    @headon:
    You are so clueless as to the unexpected “that will never be me” things that can happen in life.
    If you are lucky, you’ll stay that way. But don’t assume you know everyone else’s story. You are passing judgement without even a clue as to what thier first paragraph might say.

  17. deadlizard says:

    I guess when you have to pay the utility bill, and your medication,
    put gas on your car and get rid of the credit card debt you got for
    buying crap you don’t need, you get your priorities straight.

  18. ARP says:

    ELIZABETHD- I think they are being snide (but I don’t think its against bigger people specificaly). It sort of embodies America right now:

    An overweight, somewhat frumpy, person (could’ve been a man or woman) getting into her SUV, almost completely surrounded by other SUV’s (I can spot only one car in the foreground), with a cart full of stuff.

    God Bless America!

  19. Crumbles says:

    Ha, just wait until the Democrats get in office and raise taxes. I’m sure that will help people spend more… NOT!

  20. MsClear says:

    Free marketeers crack me up.

    And no, I’m not having trouble paying my bills. I don’t buy anything, so I guess I am contributing to the coming recession.

    But there is a tipping point. We may have reached it. People aren’t going to be able to afford double digit increases in gas prices, medical insurance, home heating etc on stagnant salaries when their over-inflated homes lose value.

    Time to come up with a new economic plan that doesn’t rely on the purchase of cheap crap.

  21. sljgold says:

    Urgh. My spending has remained fairly constant, despite a raise, but that’s because I’m finally being sensible about my debt and getting rid of it. I can live on what I had before the raise; I can’t keep going if I’ve still thousands of dollars in debt to work off.

    I do think though that we’ve generally been living beyond our means for the past several years thanks to the ease of finding available credit and worrying about the bills later. I did the same thing myself – see the debt mentioned above. Now it’s coming back to bite us and people are shocked that confidence in the economy is falling. It’s just hitting harder than before due to the higher gas prices and general CoL.

  22. Silversmok3 says:

    This consumer slowdown is because of one thing :inflation.

    The federal government, looking at billions of $ in Social Security obligations over the coming decades, changed the inflation rate. No, not by any market action, by simply changing how its calculated. This was done to save the Government billions in benefits that it would otherwise be obligated to pay.

    Essentially,its like someone hacking a bathroom scale and claiming to lose weight.

    The calculations from several economists are that the real inflation rate is at 6%.

    This means that since benefits and payouts ( such as wage and benefit contracts,pension and Social Security benefits that are adjusted for inflation) are being paid at 3% while costs and prices are rising at 6%.

    Don’t even talk about the disaster scenarios for bond market and bank interest rate payouts.

    Heres the day to day consequences: If your income is paid off a 3% interest rate and your expenses (gas,food,rent and other bills ) are at at 6%,you need to do something to match the gap. Keep in mind your income is actually worth 6% less than what the check says due to this inflation . So what do you do to bridge the gap?

    Hello, debt.

    So now people have to finance their bills on the Amex to stay ahead.But what happens when the Amex and the Home Equity Loan are tapped, and the mortgage is due?

    At least people with Lexuses (lexi?) and diamond necklases have something to sell.What happens to the single mother paying the rent on her Mastercard?

    Heres the graph and article that illustrates the damage

    [www.autodogmatic.com]

    ,

  23. vdragonmpc says:

    Sadly we still have insane ‘business reporters’ posting ‘get ready for 4$ gas in the summer!’ articles. Oil companies were watching when Katrina hit. They noted that we didnt get that upset over 3$ gas so they popped it on up to 3$ from 2.02 a gallon. If you remember they were terrified of the 2$ mark and hovered for a while at 1.99 a gallon. We got used to it and absorbed the cost.
    HOWEVER that was supposedly a short term spike. Now it is the ‘norm’ I dont know about a lot of people here but I dont see raises in income past 4-5% for regular folks per year. Prices have gone up far past 4%. We hear about inflation and recession but bottom line some of us make the same scratch as our parents in the 80′s with higher prices to kill the income we generate.
    What angers me the most is that I get raped by the heallth industry for insurance that doesnt pay for my bills but takes my money, social secuity that I will not recieve, medicare/caid that when I needed it I was told NO I make too much money, Student loans that have interest that makes sure I pay for years while taking no risk in the loan as they are paid regardless (1% interest loan I dont see that happening) then we get real estatetax, local tax, fed tax, gas tax, food tax, sales tax and my personal favorite car tax…

    Where is my money and when can I spend it on something I want? Its all been hoovered! I make pretty good money but after all of the things mentioned I barely get to keep a fraction.
    THATS WHY SPENDING IS DOWN!

  24. chili_dog says:

    @vdragonmpc: Without a doubt. I make dam good money but even I have seen the creep. Not as much left at the end of the month, grocery store trips cost more and still save the same amount.
    I actually blamed the wife for over spending last month because there was less then expected in the accounts. I didn;t believe her denials, but sure nuff, stuff is costing a lot more.

  25. chilled says:

    My lp gas bill was over 800.00 last month.I can afford it,but for how long?? It’s bound to cut into my scotch budget eventually!!

  26. vdragonmpc says:

    Silversmok3 seems to have said my rant better….

    Everytime I see a talking head on the news I just want to punch him in the mouth. I went to college to earn a better wage and provide for my family… What do I have to show for it? Student loan debt and the guy next to me with no college makes the same cash (he has experience as he worked his way up while I read about it) so he doesnt have loan debt.

    Part of my anger is based on the fact that in 1988 40-50,000 was considered pretty good income. In 2008 its not when all things are factored in… And we have these talking heads saying gas costs the same now as it did in 1980 ‘inflation adjusted’ NO IT DOES NOT!

    V

  27. smitty1123 says:

    I always spend less in January (it’s the only way I can survive November and December).

  28. GearheadGeek says:

    To those saying that it’s ridiculous to advocate saving and economizing because you’re going to have an expensive medical emergency any minute now that will wipe your finances out, BULLSHIT!

    Yes, it certainly may happen that you are hit with horrific expenses in our grossly cost-inflated healthcare system, but that’s not a reason NOT to save and try to live within your means.

    I know people who make less than I do who live in bigger/more expensive houses, drive more expensive cars, have big shiny flat-panel TVs and have kids to support. I already feel like I’m not saving enough toward my eventual (hoped-for!) retirement. We live in an age of consumerism that’s not good, and it’s not because too few people have health insurance. Hell, if the people without health insurance thought for a minute about the risk they’re taking, they’d save MORE. I’m sure some do, or at least try, but there’s a big chunk of our population who owe more than the car they’re filling up (on credit) is worth, and are already thinking about buying another one. They’re financing the family trip to Disney on credit, buying a new computer every year when they’ve gunked up the old one too much with spyware and ordering crap off Home Shopping while they wait for pizza to be delivered.

    BOTH THINGS ARE BIG PROBLEMS. I haven’t read any comments suggesting that people can pay monstrous, unplanned healthcare costs off by doing a little economizing, so where’d this idiotic strawman come from? Quote me someone writing about that and I’ll concede the point, but it sounds like yelling about one problem to distract from another.

  29. Daryl26 says:

    …add to all this the fact that the American Dollar is worth like four cents of it’s original value and it keeps going down. Well everything adds up.

    I wonder why many still fail to see that the Federal Reserve little screw the country over in national debt is also part of the problem.

  30. fairweather says:

    @ElizabethD: I don’t know if that mindset will get us to the future or not, but I will also be boarding that boat.

  31. julienne says:

    @darkened: No effect. Bankruptcies are increasing this year for precisely the reasons set forth by ARP and Silversmok3. Actually, the increase in the means test (how much you can make and still get a Chapter 7 discharge) is making it easier than when the law was changed in 2005.

    For some reason people still think you can’t get rid of credit card debt, which I attribute to the good propaganda of the credit card lenders. Credit card debt is the EASIEST debt to discharge, since every judge and trustee knows exactly how horrendous the interest can become.

  32. FLConsumer says:

    @trai_dep: Nope, sadly Americans are capable (and are doing a good job) of doing more damage to this country’s economy than any terrorist group could ever wish to do.

    @chili_dog: Not sure when you cut back on spending, but I started pulling in the reins a bit a little over a year ago and I was already living well within my means back then (minimum 30-40% of earnings going into savings). As prices have gone up, I’ve found myself cutting back. Some of my work comes from the entertainment industry, so I figured I’d see fewer hours from that. Haven’t seen it drop off quite yet, but I am seeing the # of tickets sold to events dropping. I’m also anticipating lower returns on my investments as interest rates drop and the stock market becomes increasingly volatile.

  33. Chigaimasmaro says:

    Can’t spend money if you don’t have it. With an ever shrinking middle-class, I can see why we are having money problems.