The dollar bulls are hoping (some may even be praying) that the economists at the Levy Economics Institute of Bard College (LEI) are wrong.
Yes, the U.S. economy enjoyed four-percent-plus growth last year, a new paper from LEI concedes. But don’t let that fool you, the report goes on to effectively say. The prospects for growth are dimming, and the “stark choices” facing the consumer is the gremlin in this machine.
LEI’s outlook boils down to this: consumers can’t spend more without taking on materially higher risks, but neither can they pull back without threatening recession. Damned if they do, damned if they don’t.
U.S. consumers, who’ve collectively amassed a record mountain of debt, are at or near the point where even the prospect of low financing may not be enough to trigger the purchase of a new personal computer, widescreen television, SUV or that summer home on the coast that the family’s always wanted. Or so LEI’s economists believe: “If [consumers] continue piling up new debt,” they write, “the combination of their rising debt burdens and rising interest rates will produce rapidly increasing and unsustainable ratios of debt service to income. A jump in personal bankruptcies and a sharp drop in consumer spending will be inevitable.”
We’ve all heard that one before, and a few others, and to date nothing’s come of it. Should we continue to remain nonchalant? Or is it time to bury bars of gold and spam in the backyard?
The future isn’t that bad, by LEI’s reckoning; then again, it isn’t all that good either: “If
households recognize that they cannot go much further in mortgaging their incomes to debt service, they will begin to cut back on further borrowing and slow down their current spending.” This, we’re told, is the more likely outcome of the two scenarios. “Furthermore, a new Washington and Wall Street consensus, encompassing the view that it is important to increase personal saving, is emerging in response to recent speeches by Federal Reserve Chairman Alan Greenspan, other Federal Reserve governors, and administration officials.”
Is fiscal prudence about to be imposed upon us by necessity? God help the K-mart shoppers.
Of course, evidence for LEI’s prediction may be less than imminent. The decline and fall of Joe Sixpack as a shopping entity is a losing forecast, and one with the lengthy history to prove it. And once again, there’s a fresh reason to wonder when Joe will succumb, if ever, to the fate that so many see for our middle-aged her. Consider this morning’s
Bureau of Economic Analysis release that revealed that personal income in February rose $33.2 billion, or 0.3 percent, while disposable personal income advanced $29.6 billion, or 0.3 percent.
Consumers, it seems, continue to confound the experts and spend what they earn. In fact, they’re spending more than they earn, and therein lies the problem, or so goes one line of thinking. But the other shoe has yet to drop, and in fact both shoes have been purchased on zero- and low-interest credit cards. Indeed, same-store retail sales in February rose 4.9 percent from a year earlier, the International Council of Shopping Centers announced earlier this month, based on results at 69 chains, Bloomberg News reports.
And Joe, if he’s like many lucky consumers with mailboxes, receives more than his share of credit card applications–applications that promise fresh plastic no matter one’s credit history. How’s LEI ever going to find intellectual satisfaction if credit card companies keep extending credit to consumers who can’t afford to pay off the debt they’ve already accumulated?
Then again, one month a trend does not make, and so the latest personal spending numbers should be used cautiously. But a decade or two certainly makes for more compelling evidence, doesn’t it? America’s love of buying is no recent fad. Breaking the habit, as such, won’t come easy, especially when there’s no real effort at the Fed, or Visa or MasterCard, for forcing the overextended victims to go cold turkey.
That doesn’t mean the consumer can’t mend his ways, or that personal financial probity won’t reverberate in the form of recession in the economy at large. But, we might ask, when might the day of reckoning arrive? And under what circumstances?
Everyone’s offering a theory of course, but for the moment let’s stick with LEI’s: “The personal consumption spending machine, including household investment, again raced ahead of personal income in December 2004, but its growth is unsustainable and likely to stabilize or even fall in 2005….”
This year, in short, threatens to be a pivotal one for consumer spending trends, LEI warns. What could be the trigger for the new world order? It’s any one’s guess, obviously. But considering how long consumers have been spending, and how much debt they’ve racked up, it’s not inconceivable that the game could roll on for longer than reasonably minded economists expect.
In surveying the potential catalysts for change on the consumer front, energy once again rears its ugly head, gasoline in particular. But before we go off the deep end (again), it’s worth considering just how much of a financial impact $2.00 a gallon gas has on consumers. Less than the casual observer might expect. On that subject, Legg Mason today runs off a bit of statistical perspective:

Consider that the average driver in the U.S. puts about 12,000 miles on their vehicle in a given year…. In addition, consider that the average vehicle gets somewhere around 18 miles per gallon, leaving us with an average consumption of roughly 650 gallons of gas a year. At $2 a gallon, the average capital consumers must allocate towards gasoline a year is roughly $1,300. Because gasoline is considered an inelastic good, meaning consumers will use the same amount regardless of the price, if gas prices increase 10% to $2.20 a gallon, the average amount spent will increase to $1,430. How significant of a factor is $130 a year? With an average per capita income in the U.S. of $31,500 in 2003, $130 is less than half of one percent. While it is certainly shocking to see gas at $2.20 a gallon, the overall impact to the economy and consumers themselves is really not too shocking.

If no one’s shocked at $2.20, maybe $3, $4 or even $5 a gallon might do the trick. Too far-fetched you say? Perhaps, although parts of Europe already pay such prices, and it has nothing to do with Opec. Is it relevant that consumption in Europe is something less than robust by American standards. Regardless, some governments on the Continent have ruled that it’s in the best interest of their respective economies to hike up the price of gasoline by political means, above and beyond what a free and fair market would otherwise charge.
Nothing’s imminent in the U.S. on that front, at least for the moment. Then again, one never knows what a government, any government will do given the right–or should we say wrong?–context. Or, as John Huston’s character in Chinatown tells Jack Nicholson’s Jake Gittes: “You see, Mr. Gits, most people never have to face the fact that at the right time and in the right place they’re capable of anything.”
Of course, if Goldman Sachs keeps coming out with bullish predictions that crude oil may be poised for a “super spike” that will run up a barrel to $105–as the investment bank did today–governments may be out of job when it comes to manipulating energy prices upward. Indeed, the prognostication helped drive the price oil up today over $55 a barrel after declines in previous sessions. Perhaps there’s still hope for persuading the consumer to stay home and read a book. Just be careful what you wish for.