How Big of a Hint Do We Need? The Consumer Keeps Telling Us What He Is Doing, But No One Wants To Listen
Rodney Johnson, President
HS Dent
Groucho Marx once said, “Who are you going to believe, me or your own eyes?” When it comes to the long term trend of the economy, it seems as if we can’t help believing the soothsayer, ignoring all the facts that are on the table for us to plainly see if we only wanted to look. The soothsayer, in the form of short-term market moves and market pundits, keep telling us that things are getting better! Look at stock prices, they are higher, so things must be better (don’t forget that stocks are a leading indicator!). Look at unemployment, it’s not rising as quickly (and by the way it is a lagging indicator!). Forget about those other pesky other items, like the incredible debt load being carried by the average American, the fact that unemployment continues to rise, and the fact that the largest asset most Americans hold, their house, is falling in value. These are just nagging details.
Maybe. Maybe somewhere in the United States, perhaps somewhere in Lower Manhattan, things like your personal debt, your lack of a paycheck, and the inability to move for a better opportunity because you are upside down in your house don’t matter. However in many places they do. In towns and cities all across America these things are very important. We know this to be true because consumers, through their actions, keep telling us. American consumers are buying less. When they do buy, they are spending more at Costco (same store sales up 5% year over year, October 2009), and less at Neiman Marcus (same store sales down 6% year over year, October 2009). Demand for gasoline is falling. Demand for vehicles is down to roughly 10 million units per year, from a high of 17 million units per year. We’ve followed these trends for over twenty years, and such changes as this are not the norm, they are not just a temporary blip, these are changes in trends that will be with us for many years.
So what are they doing with the money they did not spend? They are saving it, either through direct savings or by paying down debt. In the last year the United States has seen it’s national saving rate explode from close to zero up to 3-5% in 2009. It might sound paltry, but increasing the savings rate by several percentage points in such a short amount of time is a tremendous change in trend, especially when you consider that this occurred during a time of rising unemployment and falling wages. At the same time, we have begun paying down some of that mountain of debt that we are carrying. Our household debt as a percentage of personal income has exploded in recent years. From the 1960s through the 1980s, this measure bounced around 60%. As of 2008 the measure stood at over 130%, or more than double what it was just 25 years ago! This year, 2009, it has been falling. So at the same time that unemployment is going higher, we see that consumption is falling, the savings rate is going up, and debt is being paid off. The consumer is desperately trying to tell us that he has changed his ways, no longer is he a profligate spender. He is a reformed man. He is choosing to live within his means, and is very interested in reforming his balance sheet, consuming less, saving more, preparing for tomorrow.
The mood and motivation of the consumer is important. Personal consumption represents over two-thirds of GDP. As consumers choose a path of “less,” businesses are having to react to lower and slower sales. This has taken the form of even greater layoffs and less spending on advertising, marketing, technology upgrades, inventory rebuilding, etc. In the short term, that’s great, as we have seen profits rise due to cost cuts. In the long term it means that we have even more people who cannot find work, and therefore will be forced to spend less. As we tried to convey to our readers for the last two decades, there will come a point, some time at the end of the 2000s, when our economy turns from a nation of spenders to a nation of savers. This change will be subtle at first, but the ramifications so big, that most people will miss the early signs. They will dismiss it as just another selloff, although deeper than others. It will take time for the new reality to set in
But so far it appears we are not listening. We are firmly entranced by the words of the wise on Wall Street, and we are mesmerized by the price movement of equity indices as prices have zoomed higher since the catastrophic fall of last winter. These two bastions of knowledge (Wall Street pundits for all they know and the markets for all they are supposed to embody) keep telling us that everything is getting better. Forget those unemployed. Don’t look at the falling home prices. Think of V-shaped recoveries and how great things will be “once the consumer comes back.” Who are you going to believe, me or your own eyes?
Rodney Johnson is President of HS Dent, an Independent Economic Research Company that publishes the HS Dent Monthly Economic Forecast Newsletter. For over twenty years HS Dent has focused on consumer spending and demographics to forecast long-term trends in the US economy. For more information, please visit www.hsdent.com.