Consumer spending makes up 70% of the US GDP and for the first time in years, consumer spending is either flat or declining. The forces weighing on the consumer likely won’t be shortlived, which will likely make this recession longer and more painful than most people think.
An Economist editorial lays out the “quadruple whammy” clobbering the consumer:
- Falling house prices, which have reduced (and, in some cases, eliminated) the equity most Americans have in their houses and thus slowed the home-equity-withdrawal engine.
- Tighter credit conditions. Not just for mortgages, but for other forms of consumer debt, such as car loans and credit cards.
- Deteriorating labour market: unemployment increasing, wage-growth slowing. “Weekly private-sector wages rose by 3.6% in the year to March, the slowest pace since mid-2003. Headline consumer-price inflation is likely to have topped 4% in the same period, so for many real pay is falling. Economists at Goldman Sachs reckon that consumers’ real discretionary cashflow—their income plus any new credit minus debt service and spending on essentials—has been shrinking since late last year.”
- Rising inflation, especially for fuel and food.
None of these factors is likely to turn quickly, with the possible exception of inflation (we’ll believe it when we see it). The Economist:
On all four counts—house prices, credit, the labour market, and fuel and food prices—the consumer’s position is likely to worsen in coming months. Granted, the imminent fiscal stimulus should help. Between early May and mid-July $117 billion will be paid out in tax rebates. The average American household with two children will get a cheque from Uncle Sam for up to $1,800 and will spend at least some of it.
Unfortunately, most of the forces dragging down consumer spending are likely to persist long after the cheques have been banked. Even with stronger exports, growth is likely to be too sluggish to raise incomes by a lot or offer much support to employment. Looser monetary policy will cushion but not avert financial deleveraging. Lending standards are usually tight for years after credit busts, not months. And by most estimates less than half the likely losses in America’s financial sector have been written down. Meanwhile, lower house prices will reduce both homeowners’ wealth and their potential collateral.
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