No wind in these sales

October 14, 2009

American consumers have shown a remarkable ability to defy economic gravity.

In September they again pulled off this financial conjuring trick. Underlying retail sales were brisk for a second consecutive month. It is impressive that American shoppers refuse to panic when confronted with high unemployment, stagnant wages and debt levels that would make European consumers swoon.

Yet this bravura performance will become ever harder to sustain into the winter.

To fully appreciate the strength of spending in the late summer, you need to strip out a series of volatile items.

The cash for clunkers program has sent sales whipsawing over recent months. Excluding autos, gasoline and building materials, sales climbed by 0.5 percent in September, building on a 0.7 percent gain in August. Beneath these aggregate figures are other indications that consumers are more willing to splurge on luxuries. Furniture sales were up 1.4 percent over the month, while clothing sales have now climbed in each of the past three months.

The deeply ingrained American habit of overspending is dying hard. But die it must.

A series of one-off boosts to income from government stimulus efforts are drawing to a close. Much of the money that seniors received from a one-off payout from Social Security may have already been spent. A tax credit for first time homebuyers is due to expire in less than two months. The cash for clunkers program, meanwhile, could end up weighing on consumer spending for some time as households digest the financial impact of buying a new car. All that is left of the consumer stimulus then will be the very modest reduction to withholding taxes — about $33 a month for most workers.

As the government efforts fade, there is no sign that largesse from employers is picking up. Weekly pay for production workers has now fallen for nine consecutive months — the longest contraction in the 44-year history of the statistical series. Even in the 1980s recession there was only a two month decline. Real disposable incomes have fallen in each of the last three months. Pay cuts — once a rarity — are becoming all too common.

In order to stump up the cash for recent purchases, Americans have been postponing the necessary task of repairing their personal finances. Families have levels of debt that remain stubbornly high and are still close to twice the peak of the 1980s boom. Yet consumers have returned to saving just 3 percent of disposable income. At such a snail’s pace it will take roughly 9 years to bring household debt down to a more reasonable level of around 100 percent of disposable income.

Only a surge in wage growth in the coming months would enable consumers to keep spending at this pace. This is a long-shot at best.

Given this underlying weakness, the recent firmness of consumer spending is looking ever more like an Indian rope trick. Shoppers are likely to come back to earth with a bump this winter.


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I wish my debt levels would make a certain European consumer swoon…

Posted by Collin Hughes | Report as abusive

Where I am from, the mortgage payment may only equal 33% of gross income as a ‘couple’ and 25% as a single person. Then there is vehicle finance. Credit card usage has caps. Taxes, medical aid and pension/provident contributions are further deductions which then leaves ‘disposable’ income. Not much to work with, but it buys a loaf of bread and a can of beans. With household debt at 100% of disposable income, does that mean US consumers are in a debt trap or actually OK ?

Posted by Casper | Report as abusive

Surge in wage growth…. dream on. High unemployment is always a great way to put pressure on wages. Why do you think there has been a propaganda machine blowing fire at the unions for the past 100 years or so…

By the way: your title is off, it reads Commentray… Hire a proofreader, I am cheap…


Posted by Marton | Report as abusive

You are completely right! The old habits of the average American will die a very long hard death….What else did they do, but go shopping and out for dinner? For most people giving up what was once part of their “ordinary” daily lives is a lot harder than it seems. Almost everyone I knew lived well beyond their means during the last 10 years. I now know people who are in very serious financial trouble simply because they never thought the “good times” would end. Well it did and the adjustments being made are very painful for everyone I know. And yes, the socalled recovery has no basis in reality for the average American…that too will eventually effect everyone…even those on Wall St!!!

Posted by Leslie M | Report as abusive

People have been hurt to the point that they don’t feel depressed even with any horrible news any longer, be it falling consumer confidence, or falling dollar, or even China invading America, which will happen during the ice age !

But people are resilient and upbeat in nature. The free spirit of this nation can not be suppressed.
So you provide us figures or don’t provide us figures, we will not stop having fun ! YEEEEEEEEEEEEEEeeeha

Posted by AJ Duggal | Report as abusive

US consumers are in debt trap, and there is no way out. This is not considering the medical expenses that a person may incur in future. And those expenses are very definite, yet I haven’t seem them in any public financial model…

So, lets all hope that the great nations of China and India start importing American goods like crazy and outsource millions of jobs to America :):)

Posted by Ananke | Report as abusive

I don’t know about China but India just placed all her defense orders to Washington. India angered even Russia by going over board, and ignoring years of cooperation, and old treaties signed between Russians and Indians. Russians supported Chinese in getting their feet wet in Sri Lanka ?
I think you will lose India with any unwanted demands !

Posted by AJ Duggal | Report as abusive

People are still spending because the idea of real consequences for overspending are not there. If white collar criminals can get away with spending other people’s money with just a slap on the wrist then why should anyone else care?

Posted by Moose | Report as abusive

What you may not get is that there ARE necessities. Clothes wear out, as do cars and tools and other items that people need to go on living. When they stop spending for a year or two, of course there is a pent-up demand. Unfortunately it seems to be releasing itself just as inventories have shrunk to the bare bone. If supply and demand mean anything, then that means higher prices, which shrinks all but necessary expenditures. We are about to have runaway inflation, high unemployment, shrinking personal wealth, falling disposable income, tight credit and a collapsing dollar all at the same time. Talk about irrational exhuberance! We are just about to tip off the cliff and the stock analysts are telling us the worst is over. Hope you have a parachute!

Posted by Jonathan Cole | Report as abusive

Well, we keep hearing and reading that the recession is over, or almost over, or about to be over, and so on…,
No wonder some people tend to get over-optimistic and overspend…

FYI, it’s not over till it’s over

PS — Save your $$$

Posted by yr | Report as abusive

Yes, the American Dream is just that, A DREAM! People need to wake up to the realities of the world and stop spending more than they make and set more realistic goals. Stop idolizing celebrities and other famous wealthy people who actually WORKED for their money. Even if they inherited it, you’re not them.

Americans need to stop keeping up with Joneses. Consumerism kill! Corporations depend on the little guy to make the big guys rich. Then the corporations turn around and pit the little guys against each other in order to keep profits up. Just look at healthcare… Corporate executives HAVE health insurance. They don’t care if the little guy does. They only care that YOU pay for THEIRS!

Jobs are plentiful for those who want to work. I just got a job within 1 1/2 months of moving back to California and 3 days of looking and THEY CALLED ME!!

Don’t believe the Hype in the Media.

Posted by Amanda | Report as abusive

I don’t know where this author gets his info, but I own a restaurant and I can tell you that sales are down across the board in my industry. Everyone I talk to is seeing rough times. Perhaps this fool should take a jump across the pond and talk to business owners instead of interpreting data.

Posted by BIG D | Report as abusive

Sales aren’t up because people had “pent up demand”.
Just so we’re clear on that.
I have been hoping for this Recession for almost 5 years, and I have been very disheartened by the American’s average ability to be frugal. Even some of the elderly who came up in the aftermath of the depression are hopeless spenders! That said, there will almost certainly be an echo recession, when the consumer credit numbers get too high, and can’t be shifted anymore, and default rates on typically “casual” credit break %50

Posted by Mitchell | Report as abusive

I am one of the Americans that am suffering from the economic troubles we face, however where I live, Pensacola, florida, in my neighborhood our friends and neighbors gather together share meals, always check with each other before we discard almost anything of value. We are finally recycling, actually looking much harder for work. Additionally we have shed our over blown degree of self importance and will do whatever it takes to pay rent, gas, food, shop at thrift stores etc. Instead of fixing my car, I bought a bike, do not have to pay inflated car insurance, fuel and it helps me shed a few ugly pounds of fat. I am 51 so althogther it is better for my health. This economic trouble has forced us to stay local, buy local, grow our own vegetables and really look for bargains. We are a resilient nation and despite the lack of Presidential leadership our whole situation will turn around for the best. If we were never in the valleys, we would not appreciate the view from the top of the hills.

Posted by david s. gioia | Report as abusive

There used to be a button that said “first we kill all the lawyers.”
It’s time to come up with a new button which may read something like “first we kill the money changers”

Posted by yoda | Report as abusive