Thursday, September 29, 2005

Consumer Spending, Housing & Recession

American's spending spree is unsustainable. It has been fueled by a credit bubble. The credit bubble is fueling both strong consumer spending and the housing bubble.

The personal savings rate is dangerously low. "Americans no longer stuff their savings under their mattresses. Instead, their homes have become the national piggy bank of choice. ( Investor's Business Daily Article )". According to the Federal Reserve Board the US "personal savings rate sank to -1.8% during the second quarter, meaning Americans used credit, asset sales or past savings to underwrite more purchases than their monthly income alone would allow. In contrast, the Japanese save about 7% of their disposable income while many Europeans sock away more than $10 for every $100 they earn, says the OECD ( IBD Article )."

What has caused this spending spree? The spending spree has been fueled by the credit bubble. The credit bubble has been fueled by extremely low short term interest rates ( 1% at one point) and a 'global savings glut'. The US has declared a war on savings and savers. Until recently, the interest rate banks were offering was not even keeping up with inflation. Remember when banks were offering .96% on one year CDs. Pathetic. After 9/11, one of the things President Bush told us was to go forth and shop. Shop till you drop.

But others wonder how long the consumer, who is already spending much - if not more —- of his disposable income every month, can keep up his buying pace.

Housing is the linchpin. If home price appreciation slows or flattens, homeowners will have less equity to tap for future borrowings.

A cooling housing market may also make consumers feel less certain real estate holdings will carry them through retirement, encouraging them to stash more at the bank.

With gasoline prices already nipping at disposable income, the thinking goes, extra savings may come at the expense of vacations, dining out, and other discretionary purchases. (IBD)

On October 17th the new bankruptcy laws go into effect. On top of that the new credit card repayment schedule takes effect. Next month, people who have held a credit card for some time should get a surprise: each month, they will have to pay 4 percent of the outstanding balance on the card, not 2 percent.

This move was dictated by the federal government's comptroller of the currency in 2003. The phase-in for new customers began in the summer, and October is the big month for existing customers. It's not small change. Almost 40 percent of credit-card holders pay only the minimum balance, according to

The average household credit-card balance is around $9000, according to Boston's Babson Capital. Previously, families paid a minimum of $180 a month. Now, they will have to pay $360 each month. ( San Diego Reader 9/22/05)

The very strong consumer spending and housing bubble are entirely unsustainable. So how long can this unsustainable situation continue? Not much. The party is almost over. The alcohol which was bought on credit is about to run out. Next year, America will be in for a nasty hangover. A recession is coming.

*********Please Note: this post was up early but the html was seriously messed up and was causing the blog to crash. I deleted the post and start again. Sorry to marinite and skytrekker who left insightful comments.*****


  1. Interesting post. People just have really skewed definitions of living within their means-- if they even think about it enough to bother to define it. I've been agonizing over how to afford a home in this market and I realized that even my "way overextending myself" scenario still has me saving about 12% of my take-home pay. Guess I belong in Europe.
    How much should you spend on housing?

  2. David,

    I think it's obvious that the consumer is pretty much tapped out. Rising oil prices are putting a huge strain on joe six pack. A lot of "equity" has been spent in Wal Mart, and you can't get it back. However, I believe it will be the creditors who are going to take the big hit in the slow down. If you look at what happened in Japan, it was the banks who were killed when they tried to foreclose on properties that were worth only 20% of the original loan. It has taken them more than 15 years to work through this.
    I think we are all in for some belt tightening.