Here lies the Great American Consumer

By J Saft
September 10, 2009

jamessaft1.jpg–James Saft is a Reuters columnist. The opinions expressed are his own–

Rest in peace, Great American Consumer. We will not see your like again.

“Cash-for-clunkers” aside, consumers seem bent on actually paying back debt rather than racking it up, a change that if sustained, as it is likely to be, will dampen economic growth not for months but for years, and not just in the U.S.

Outstanding U.S. consumer borrowing fell by a jaw-dropping $21.6 billion in July, according to data released this week by the Federal Reserve, five times more than analysts expected and the second largest monthly drop since the end of World War II.

June’s borrowing was revised to negative $15.5 billion from what had been an impressive minus $10.3 billion.

Over the past year, the stock of consumer loans outstanding has dropped by 4.2 percent, or nearly $110 billion, leaving the total now lower than it was before the crisis began in 2007.

Over the long term, this is exactly what needs to happen. With household wealth badly hit by the housing and stock market crashes balance sheets are stretched. And with a huge baby boomer cohort hurtling towards retirement age also, spending and borrowing were bound to be curtailed.

The question really becomes how entrenched the trend towards the new frugality becomes.

“Memories of debt are very powerful. The generation that grew up in the 1920s and 1930s, was wary of getting into debt as it – and its parents – had experienced two periods of deflation,” Lombard Street Research economist Gabriel Stein wrote in a note to clients.

“We are now in another period of debt repayment and deflation. The thought that US households will forget 2007-2009 and begin to borrow and spend as they did in the early 2000s, is fanciful at best.”

For years the mantra on Wall Street was “don’t bet against the American consumer,” a creature so fabulously resilient as to be almost super human.

Wars and recessions did little to brook consumption and the debt that grew alongside. Even the September 11 attacks saw healthy month on month growth in borrowing in the aftermath.

Whole industries, some now vanished, were predicated on Americans continuing to borrow and spend. It’s an overstatement, but only a slight one, to say that the global economy was predicated on U.S. consumption, which in turn was predicated on consumers borrowing.

THE NEW FRUGALITY

It is doubtless true that lenders of all stripes are making credit harder to get. But there is a good bit of evidence that individuals are changing their preferences. Much of the cash from stimulus handouts earlier this year was used to pay down debt rather than goosing consumption.

A Gallup poll asking Americans how much they had spent in the past day, not including major purchases or normal household bills hit $63 when most recently measured, down from above $100 a year ago.

Now on the face of it, that reduction must be overstated. If consumption had fallen by that magnitude, we’d be in a depression rather than debating the strength of a recovery.

But of course the Gallup poll is a self reported one, and I would be willing to bet that people are now exaggerating how frugal they are, where once they would have exaggerated how much they were spending. That in itself is an important marker of a social trend. Once you wanted the nice people at Gallup to think you were a big shot leaking money, now you probably want them to see you as a saver.

Gallup also looked at the data by generational group, and found that it was not just those in or approaching retirement who were cutting back on self-reported spending. So-called Generation Xers and Millennials, who followed the boomers into the workforce, are also cutting back in similar scale.

But the issue isn’t the rate of savings but the stock of savings as compared to liabilities. While it is reasonably possible to cut back on spending and so increase your savings rate that is far different from suddenly becoming financially robust.

The other thing to bear in mind is that there is a huge difference between stocks and flows. A person can quite quickly raise her savings rate – as we have seen – but that does not mean that her debts are quickly paid off.

If U.S. consumers cut debt as quickly as Japanese corporations did in the 1990s, it will still take them until 2018 to get their debt down to 100 percent of GDP from recent peaks of 130 percent, according to a study from the San Francisco Federal Reserve.

If the trend in consumer borrowing continues, it will not be long before the conversation will turn back to stimulus, quantitative easing, and a relapse for the U.S. economy.

–At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.–

12 comments

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Mr. Saft:

You’ve hit it smartly on the nail. As I write about in detail in my book ECOpreneuring, we cannot consume our way out of the Great Recession any more than “save our planet” simply by just buying “green” products. What you have not addressed in this post is that many who have adopted frugality rules have rediscovered that less can be more: more freedom, community, family, peace of mind. Many of us are spending less and growing more of our own food, for example. Or investing in renewable energy to make our own energy. We need to devolve our government (not increase it) and recreate enterprises that are focused on a restoration economy (not the present destructive one).

Millions of Americans are refusing to make a “death pledge” (from which the French word “mort-gage” is derived). I’m one of them. And I finally feel free.

I believe we will approach a tipping point in the next 6-9 months. Most individuals will continue to reduce debt until this time. BUT things that are now necessities (TVs, cars, white goods, etc.) eventually need replacement. High cost goods require borrowing. The cycle will resume but by a lesser degree than we have seen- akin to the 80s. That brings me to my next point.

As a X’er, I lived through the 80s. There was less things and less social pressures to surround oneself with the appearance of wealth. I hope the past repeats itself. I am under no illusion others will live as I do, but I feel a moderation coming. I don’t however see this as economically catastrophic as others say. I believe China will be most hurt by this realty not the US. The unnecessary things we buy are predominantly Chinese made now. They will be most affected.

That brings me to USA/EU’s millennials. The many I have known have lived excess to an extreme degree. They are the most pampered generation in history. Their parents are to blame for instilling the sense of entitlement and lack of work ethic. All the while leveraging household balance sheets to accomplish such an unproductive mindset. They have a rude awakening coming. May the past does not repeat itself here.

Posted by Matt | Report as abusive

The fact that US consumers decided to cut down on consumption is not as bad as it seems, and not as bad as it would have been just a couple of decades back when America actually produced most of what was consumed, and then some for export. Since most of consumer goods are imported, it’s the producing countries that would take the hit. Mostly it will affect China and other emerging economies of Asia, though Europe and Japan would also feel it.
As for the drop in borrowing, the consumers as profligate borrowers are being replaced by none else but Uncle Sam himself. The funds borrowed by US tend to be spent domestically, so this change may actually be to some extent beneficial for American economy. With so much money either borrowed by US or created by Fed out of thin air (or paper and green ink, which is essentially the same) inflation is more probable than deflation.

Posted by Anonymous | Report as abusive

I grew up in the UK in the 1970′s and early 1980′s. As a result of those formative experiences, I have always been frugal. But it didn’t take long for another generation to grow up under me and start consuming again — indeed, I still experience a kind of culture shock when I hear people refer to “the 80′s” as a boom time!

So if you’re hoping for current generations of consumers to start spending again, I agree, you’ll have a long wait. But I don’t think you’ll need to wait as long for their children.

Posted by Ian Kemmish | Report as abusive

I think this is more of a demographic trend that is just now starting. Baby Boomer spending will continue to decrease, its a function of age and the number of people in this age group. I think people from my generation (Gen-X) are generally much more conservative when it comes to spending, consumption, and most importantly the desire to take on a lot of debt. With the looming shortages in government entitlement, it doesn’t make a whole lot of sense to borrow against the future, and everyone in my generation knows it….

Posted by Joe Bonasses | Report as abusive

It is about time that Americans wake up and realize that debt is bad…not good.

Posted by Jim Smith | Report as abusive

One would hope the US Government would take the same approach the consumer has …!!

Posted by Bob | Report as abusive

Paying off my 15-year mortgage in about 8 years (at the end of the 90-ies) has been my best “investment”:
- Psychologically: the stress removal by not having to make a monthly payment has changed me substantially
- Financially: I would have lost a ton if I would have bought stocks instead

It would be wise if the government would do the same at its level: slowly decreasing the entitlements for which it is responsible. The well-intended generosity of the previous century has – as a side effect – caused the majority of the population to become economically
dysfunctional, i.e. consuming more in social services than what they pay in taxes (healthcare and public education).

Economists using the GDP metric for short term analysis makes sense, but is totally flawed for assessing the long term trends of nations; see:
http://rs6.risingnet.net/~ddcc/wbi/
and in particular:
http://rs6.risingnet.net/~ddcc/wbi/Econo my.html

Yes we can all take credit for reducing debt and whilst it has always been an objective of mine and doubtless the majority. I feel that the premise of the article this is that this is voluntary, “The new Frugality” is incorrect .
In the last 2 years , bearing in mind that my personal circumstances have not changed, the interest rates that I am paying have gone from an average of 9% to 19% [bank rate here from +/-6%-0.5 %], my access to credit has been cut by 35% + on the basis that “this reflects my credit score”. I say again my personal circumstances have not changed.
In this same 2 year period I have paid off my mortgage early and am within 2 months of having paid off a personal loan ,my long term savings with credit provider exceed my total credit by a factor 8, and reduced my credit card debt by 30%
Whilst I agree with the analysis that if we don’t spend there will be pain on the consumption front I do rather feel that if the current criteria applied to me had been applied to the financial institutions , I would say in 2000, the current mess would have been avoided.
In summary it seems to me simpler than James suggests and his criteria should be the recession [ in all it's guises] will not finish until 1] the banks have recapitalised [ probably by extortionate interest rates and reneging on or dramatically varying agreements ] 2] we as individuals have recapitalised under the duress outlined above rather than by ” a change in mood “.
Speaking for myself only ,the duress is counter productive as it makes all my planning irrelevant at the stroke of a computer pen and therefore much more cautious whether we are talking investment or spending.
Once the banks stop acting irrationally and become trustworthy on the contractual front I have no doubt that we will all be prepared to enter into agreements with them , In the meantime only the desperate will hense reinforcing the “sub-prime” Catch 22 , i.e. the only people who want to borrow cannot repay therefore whoever wants to borrow cannot repay .
James I feel that your statistical analysis is correct but the motive your suggest is not .
Credit=trust according to the dictionary if the bank’s computers don’t trust us and we don’t trust the banks none of us are going anywhere is the bottom line . So I agree with you but for different reasons which I hope you will note and comment on .

Posted by Dermot | Report as abusive

I would like to touch on something mentioned about consumer goods and electronics.

In the 80′s the VCR came out (I’m getting old…rats) and with this new gadget everyone went out to buy one. And then came the PC and again everyone went out to buy one. The DVD next. The cell phone. Flat panel TV. LCD TV. Digital Cameras. Ipods, etc.

What the world needs is the next technological advancement, which will bring billions of consumers back into the stores and restart the Keynesian model.

Posted by Drew Kreutzweiser | Report as abusive

Dear Mr.James,
I am a one of your follower from twitters captions.
This is an interesting article on Americans consumer interests.
Americans always wants to have new, and a latest invention on communication and on new automobiles.
The evolution of electronic and communication devices-
Record Players, CD,Video Player, VCR,DVD Player, latest Land line phone sets, Mobile from single digit to very latest,Mobile with video pictures, Mobile with music downloading, mobile with web surfing, lot of storages,PC,PC with all latest devices, and now with latest gadgets,cameras, digital Photo graphic devices, web services ,credit cards, debit cards, ATM ,and now with mobile payment systems.
These are all creations to luxurious enjoyment.
If these latest technological advancement with high rates goes on few years, then there will be no direct contact with their own fellow beings.
You might have read !Future Shock! by a famous author.
Even that books arrived conclusions had crossed to write a new book on a great,great future shock.
B.Russel, a well known philosopher, author on many books on mathematics, logic, economic and political ideas,and many urges to live peacefully with all nations.
When i was in Honors degree level, one lesson on this famous authors writings says, A Day will come, world people will take capsules instead of meals for their today life.
That is happening on now.

Dear James Saft,

just wanted to say that I really appreciate every one of your analyses.

Brilliant, outstanding.

Keep writing

Malte
Munich, Germany

Posted by Comment from Munich | Report as abusive