The consumer buying binge is over

This article shares the author's view that consumers are out of money, and that creditors are less likely to give them more. He is predicting that consumers will now buy less and that the economy will suffer for it. Although he is not predicting a recession, he states that 'one wouldn't surprise me.'

Are American consumers really out of money? Will the gluttonous spending habits of the recent past subside and 'practical budgeting' among consumers take over?

Personally, I feel that American consumers will justify a short extension to their gluttony through the holidays in order to maintain the perception that they are not in financial trouble. I am reminded of the television commercial where the guy is smiling much bigger than a person normally would, and states under his breath, 'look at my huge house and nice car...I am in debt up to my eyeballs...someone please help me.'

Our ambition to have more than the next guy will push us farther into consumer debt through the holidays. This will make 1st quarter 2008 an even greater dilemma as all of the credit card bills come due and American consumers finally realize that they don't have enough money to pay for it.

So I agree with the author that market indicators point to the consumer being out of money, I just don't think that the consumer is ready to admit it to themselves yet. The demand curve will artificially be maintained close to its current position, at least until 1st quarter 2008. Then I would agree that it will shift backward as consumers will be less willing to pay for the same level of supplied goods/services. Suppliers are forecasting this as well and will produce less since the demand will be for a lower quantity. The price may stay relatively the same; there will just be less available.


Timothy said...

I think that the American public will continue to buy even though we are being stared in the face with economic destruction because a large portion of people are oblivious to the fact that we are teetering on the edge of a recession. I just think the public is really misinformed. Maybe they'd listen if Brittney Spears was to sing about it.

Sophie said...

Debt is a serious issue in our society today, but there are definitely those people that are still able to afford things without credit. Therefore, it may be true that consumer buying may decrease slightly in order to get rid of all of these over extended consumers. Overall though, buyers are still going to keep buying all of the goods that they currently do. Thus, I believe our economy is not going to see a big recession come about because of a lack of consumer buying.

Dr. Tufte said...

My specialty is macroeconomics - so bear with me while I toss out some ideas that are considered heretical.

1) Most people who talk about macroeconomics don't know much about what they are talking about. Macro is like evolution or sexuality: everyone has an opinion. This is not implying that the post and comments are wrong, just a warning that you need to have all your BS filters working when thinking about macro.
2) The onset of recessions isn't predictable. This is the single most heavily studied problem in human history, and we don't have much of a clue yet.
3) There is an underlying opposition to the use of debt in western cultures that goes back to medieval Catholocism, and really to apocolyptic religious traditions from the ancient Middle East. It is a mistake to think anyone is independent of that, or that we have outgrown it.
4) Consumer purchases are simply not volatile enough to be a significant cause of recessions. We notice the big ticket purchases, but the bottom line is that 90-95% of household purchases are stable payments for shelter, food, energy, clothing and entertainment.
5) For better or worse, we have a regulatory system that encourages people to leverage their residential real estate purchases. Yes, this is kissing cousin of gambling at a casino, but, having said that, it is probably immoral to suggest that others ought not to take such gambles if they have positive expected value. You know: "people in glass houses ..."
6) Debt is a stock, while GDP is a flow. Recessions are all about GDP. It isn't impossible, but it does require a leap of faith to claim a causal theoretical relationship from a stock to a flow. The real link would be from debt payments (a flow) to GDP. But ... you don't hear the Chicken Littles complaining quite as much about debt payments as they do about debt. This ought to tell you something about the proportion of clear thinking versus finger pointing on their part.
7) Most people ascribe to the "one big cause" view of the world. But, recessions aren't like that - they have lots of little causes. If someone is talking about one thing causing a recession - like debt - without a laundry list of supporting problems, they're probably not very well informed.
8) Many people's view of world problems is that they are caused by dumb people making stupid choices. This is the "every one except me is a bad driver" view of events. Except it is tautological that the typical driver is ... average. The same goes for household debt purchases: it's very unlikely that huge numbers of people are individually and simultaneously making predominantly bad choices, so a theory of recession based on this is likely to be popular, but not successful.

Having said all this, the debt and residential real estate situation isn't very pretty. This could very easily get a lot worse before it gets better. But, it isn't like folks just burned the money they spent, is it? Rather, they converted their liquid assets (cash) into illiquid assets (stuff in their closets). That isn't an easy process to reverse, but markets are able to do it given time and freedom.