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Spending isn't ending: the tapped-out consumer is a myth, and stronger job growth will help debunk it.

With the reports of holiday spending having come in above the expectations of most, the new worry of those who choose to look through the economic glass darkly is that the consumer is now tapped out and, what's worse, has no savings to fall back on.

It's true that the personal savings rate is near zero, but the way the Bureau of Economic Analysis measures savings misses most of the ways consumers save today.

If you refinance your home, pulling out some extra cash in the process doesn't count as savings, for example. Gains made in the stock market aren't counted as savings. And if you put money into your company 401(k) every month, that's considered pre-tax income and thus doesn't count as savings, either.

A better way to look at the balance-sheet health of the consumer would be to scrutinize the changes in net worth. Household net worth through the third quarter of 2004 stood at $46.5 trillion, up 8.6 percent in the past year and more than 80 percent in

But as if the low level of savings weren't enough to worry about, the pessimists are also arguing that consumers are up to their eyeballs in debt.

Financial leverage

Debt burdens are high, certainly, but they've been higher, and high debt doesn't necessarily portend unstable finances.

Does anybody worry about General Motors being up to its eyeballs in debt? No, because General Motors has both the cash flow to service that debt and the asset base to maintain that cash flow. The same could be said of the consumer.

A better measure of the state of the house hold balance sheet is financial leverage. Despite the rapid growth in debt over the past couple of years, overall household leverage is down. Rising home and equity values have increased household assets at a faster pace than the increase in debt.

For every dollar of debt the household sector has, it also has just over $5.70 in assets. In the past two years, for every dollar increase in debt, households have added $1.20 in assets, which is hardly a cause for concern.

And finally, the health of the discounters and dollar stores is supposedly being hurt by the fall in real wages, which is presumably cutting into consumer purchasing power.

It's true that real wages were down in the second half of 2004, an unusual development at this stage in the business cycle. Usually, when the jobless rate falls, wages begin to pick up. But the decline in real wages was due to two Factors: First, the sharp rise in oil prices pushed up consumer inflation and undercut wage gains; second, benefit costs rose sharply again, cutting into the ability of employers to raise wages.

In late October the commodity exchanges all increased the margin costs to trade energy contracts. That took much of the speculative froth out of the price of energy. Warmer weather and less speculation pushed energy prices down sharply. Lower energy prices will result in lower inflation and higher real wages.

The case for sustained consumer expenditures begins with an improved job market. Following the presidential election, most surveys of c.e.o. confidence showed a rebound that was closely tied to increased hiring expectations. Since the beginning of 2004 the pace of employment growth has been slowly improving. In the past year, employment has increased by just over 2 million jobs. In 2005, employment growth is likely to do even better.

So, far from being a source of worry regarding the economy, the consumer in 2005 should continue to be seen as a source of economic strength. Stronger job growth, coupled with a de-leveraging balance sheet, will put consumers in a position to continue spending much as they have over the past three years.

Carl Steidtmann, chief economist for New York-based Deloitte Research, is a recognized expert on economic forecasting of retail sales activity, consumer trends, and general economic conditions.
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Comment:Spending isn't ending: the tapped-out consumer is a myth, and stronger job growth will help debunk it.
Author:Steidtmann, Carl
Publication:Progressive Grocer
Geographic Code:1USA
Date:Feb 1, 2005
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