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As the U.S. Economy Slows, Americans Continue Spending by Extracting Wealth from Homes as Savings Rate Falls By Stephen Esbin
The strength of the U.S. economy is tied to consumer spending which fuels two-thirds of the economy. As a nation, Americans historically spend despite stressful economic conditions and thinner wallets. As the economy slows down how much longer can consumers continue to spend? What we do know is that consumers are spending but where is the money coming from? In 2006, Americans spent everything they earned and more. The U.S. savings rate is at the lowest level since the Great Depression. The U.S. Commerce Department reports the savings rate in 2006 was a negative one percent. This means that consumers spent more than they made, dipped into savings and increased borrowing to finance purchases. Over the past few years, Americans enjoyed significant gains in their investments such as stock portfolios and homes. Their homes are viewed as “financial assets” and in 2006 they extracted $257 billion of wealth from their homes—a 9.4% increase from 2005. We have almost unlimited access to credit and do not hesitate to leverage our financial futures. Many middle-class wage earners are doing everything they can to maintain their current lifestyles and resist reductions in their standard of living. If they don’t it’s punishment and if they can’t it’s embarrassment. As fuel prices increased over the past year, consumer spending began to decline. But the decline may be viewed as a timely reallocation of resources. Consumers prioritize their purchases. For example, they did not cancel vacations but took less expensive ones. They might delay a major purchase at modest cost but opt for an expensive large flat panel television when they are ready to buy. If you are looking for logic don’t, there isn’t any. By and large, consumer confidence plays a large part in their purchasing behavior. If they are feeling good, they will access credit, or home equity, to buy their way to happiness. If history serves as a guide to the future, Americans have always managed to adjust during an economic slowdown. Their spending dramatically shifts to home improvement activities, household furnishings, spending more quality time at home, and shopping more from home thanks to the Internet while saving money on gas. Make no mistake about American purchasing power and behavior. They are no more immune from an economic slowdown than their fellow consumers in other countries. It may be that their state of mind and optimism enables them to adapt to economic pressures in the belief that tomorrow will be better than today—shopping and spending is therapy for most people. It is not without risk but to Americans it is a risk worth taking. |