Heading Into The Holiday Season, The US Consumer Is Worse Off Than Last Year

As so often happens, one of the biggest surprises of the recent period of broad economic weakness, has been the American consumer, who always somehow manages to come through (or so the official econometric authorities make us believe) and cross a chasm of economic stagnation with shopping bags full of stuff. But while the "consumer" (or his department of truth proxy) has sourced the US economic dynamo in the past several months as Europe imploded, and thus served as a supporting brace for the latest incarnation of the US decoupling thesis (where not just Europe, but also the economies of Japan and China have been deteriorating rapidly), the reality is that unless European problems are promptly fixed (which they won't be) the last ditch global economic support pillar, the US consumer, is about to roll over, because as Bank of America explains, "heading into the holiday shopping season; most [consumer statistics] measures are no better than they were last year. In fact, many are worse." And in what may be news to JP Morgan, "With home prices continuing to decline, a wealth driven consumption binge looks unlikely." In other words, while for now the bottom had managed not to fall off the global economy as the tapped out US consumer spent their last dollar to avoid a worldwide re-depression, if European problems are not rapidly resolved, and by that we mean well before the Thanksgiving sales begin, not even "record" corporate profits (which incidentally are rolling over and are purely at the expense of consumption capacity), will do much to prevent the market from finally catching up to reality.

Bank of America explains further:

One of the surprises in the recent data has been the resilience of the US consumer. Auto sales continue to trend higher as Japan-related supply-chain disruptions fade. The back-to-school shopping season was strong, with a 5.5% year-over-year gain in chain-store sales in September. A strong back-to-school season implies a strong holiday season. Unfortunately, we do not believe the recent strength in consumption is sustainable and remain cautious on consumers as we head into the holiday season. We expect real consumption to run just 2.0% annualized in Q4, barely keeping up with the growth in the overall economy.


Households face very tight budgets. Since hitting a nearby peak of 5.3% in June, the savings rate has declined 0.8ppt to 4.5%, the lowest level since December 2009. Over this period, real income growth has been weak; indeed, real disposable income is lower today than it was heading into 2011. And, while consumer price inflation receded recently, there has been limited follow through to real incomes since wage growth has also declined. The bottom-line is that there is a limit to how much households will be able to draw down their savings to finance spending. Table 1 summarizes several consumer statistics heading into the holiday shopping season; most measures are no better than they were last year. In fact, many are worse.


Meanwhile, consumers are still recovering from the wealth shock of 2008-09. On the one hand, consumers have made progress in repairing their balance sheet. The debt-to-income ratio has dropped to mid-2000 levels. However, net worth has barely recovered from its lows. In fact, nearly all the improvement in wealth has been driven by price appreciation in the stock market. The value of real estate assets has actually declined since the recession has ended. A home is the principal asset on the balance sheet of the average consumer. With home prices continuing to decline, a wealth driven consumption binge looks unlikely.


Policy dysfunction in Washington is adding to the laundry-list of concerns. Last year’s tax compromise included a one-year payroll tax cut and extension of jobless benefits for 2011. However, similar to last year’s tax debate, the debate over the fate of these policies will likely undercut consumer sentiment and economic activity. The risk of higher taxes next year might be having a negative impact on consumption now. Together, the expiration of the payroll tax cut and the failure to extend jobless benefits will hit personal income by roughly $130bn next year.

And if there is one thing that is absolutely certain this year, in addition to death and taxes, is that if there is something that congress and the senate can disagree on, it is everything. Kiss any fiscal stimulus extensions goodbye into 2012.


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