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The Outlook for Consumer Spending is Weak

Posted by Kristi Larson.

  

More Americans are struggling to make ends meet these days. The chart below shows that consumer spending has been in a downtrend from 2007-2008. Slow growth in real wages and high levels of indebtedness have raised doubts about the ability of U.S. consumers to keep spending. 

 

Source: Thomson Financial

  

Real wages have been growing at historically low rates, particularly over the last decade. Real wages have been impacted by both slower growth in nominal wages and, more recently, accelerating rates of inflation.  The combined effect of these factors has reduced the buying power of workers’ paychecks.  Additionally, the weak job market has led to a decline in average weekly hours worked, putting a further dent into workers’ earnings. [1] The unemployment rate recently spiked to a five-year high of 6.1%.  Not only have employers cut their payrolls for 8 straight months, the unemployment rate for August was 0.3% higher than economists’ forecasts. [2]

 

Household debt as a percentage of net worth is at 68%, the highest since 2002. [3] A greater portion of the average household debt mix is consumer debt, mainly in the form of credit card debt.  The average American household currently owes around $8,500 in credit card debt.  This is a disturbing 300% increase from 1990.  Moreover, the average interest rate on this debt is approximately 18.9%.  The average American spends $1,200 a year just in interest payments, and a whooping 23% of consumers have reached the maximum limit on their credit cards. This supports the idea that consumers are overextended and unlikely to significantly increase spending in the near term. [4]

 

Inflation is also eating into consumers’ spending power. The average inflation rate, as determined by the percentage annual change in the Consumer Price Index (below), shows that the rate of inflation is the highest it has been in the last decade.

 

Source: Thomson Financial

 

Did the stimulus package have a significant effect on consumer spending? So far there has been mixed reviews regarding the effectiveness of the stimulus package. There was a temporary boost in the second quarter of 2008 in consumer spending, which grew at an annual rate of 1.5%. An estimated $160 billion was injected into the economy, but it was unable jumpstart an economic recovery. [5] Congress is considering a second economic stimulus package in the $50 billon range.  This second package would attempt to stimulate job creation in addition to consumer spending. [6]

 

Forecasters are predicting consumers will continue to cut consumption, a troublesome prospect for retailers. Early forecasts are predicting a weak holiday shopping season. The National Retail Federation is forecasting the holiday sales season will be around 2.2%, which is significantly below the 10-year average of 4.4% and the lowest since 2002, which saw a sales increase of 1.3%. [7]

 

The U.S. consumer is heavily in debt, has been overspending his/her budget, and is under considerable financial stress.  There doesn’t appear to be a light at the end of the tunnel in the near future.  Bank of America CEO Kenneth Lewis sums it up best: “American consumers need time to restore some balance to their household finances.” [8]