The once mighty American consumer is emerging from the recession weighed down by worries about jobs and debts and in no mood to drive a global economic recovery.
As the financial crisis has eased, more Americans have opened their wallets. But their modest overall spending bears little resemblance to pre-recession splurging.
Shoppers turned especially cautious in May, defying economists’ predictions of a rise. Retail sales fell 1.2 per cent from the prior month, the first such decline since last September, according to data from the Commerce Department released Friday.
Leading the decline was a large tumble in sales at building-material stores. Sales at car dealers and gas stations also dropped.
The pullback underscores the broader hurdles facing American consumers, whose purchases make up more than two-thirds of U.S. economic output, and casts doubt on the future vigour of their spending.
Like recovering addicts, American consumers are convalescing after years of bingeing. That type of spending came to a shuddering stop in the financial crisis as house prices tumbled and once-plentiful lending vanished.
The era when households could dramatically ramp up their debt and shovel it into consumption is over, says Kevin Lansing, an economist at the Federal Reserve Bank of San Francisco. “The economy can’t grow as fast as it was growing from 1995 to 2005,” he said. “It was a one-time thing.”
Fearing a repeat of the Great Depression, the government ramped up its own spending and offered a host of incentives aimed at getting consumers to buy cars, houses, even appliances.
Those efforts succeeded for the most part, helping produce a very healthy rebound in consumer spending in the first quarter of this year. It grew 3.5 per cent at an annualized rate, the best performance in three years, and powered the 3-per-cent jump in GDP for the quarter.
Now, however, the effects of the government stimulus are slowly petering out, while banks remain reluctant to extend credit to consumers. Unless either of those factors changes, consumer spending will have to grow the old-fashioned way – through rising incomes.
“To the extent that consumers are going to have ammunition to spend, it’s going to come from wages and salaries,” said Joshua Shapiro, chief U.S. economist at MFR Inc. in New York. But since the unemployment rate is hovering near 10 per cent and hiring remains anemic, consumer spending will be lacklustre, he says. Mr. Shapiro predicts that its growth will slow to 2.5 per cent in the latter part of this year, and dip below that rate in 2011.
Charles Plosser, head of the Federal Reserve Bank of Philadelphia, noted in a speech Friday that while consumer spending had improved in recent months, it wouldn’t rebound as strongly as it did after prior recessions. That’s because “labour market weakness will likely restrain income growth and thus consumer purchases.”
There’s another major restraint on spending: the enormous overhang of borrowing in the form of mortgages, home equity loans, and credit cards. While Americans have begun to bring down their debt levels, they still have a very long way to go.
At its peak, the household sector’s debt level was about 22.5 per cent of assets. It has since fallen to about 20 per cent in the first quarter of this year. However, that’s still well above the ratio of 15 per cent that prevailed in the mid-1990s.
Americans can reduce their debt in two ways – by increasing their savings and paying it down, or by defaulting on it. That process is likely to rein in consumer spending and overall economic growth for years to come.
Some experts believe that the recession has fundamentally changed the way Americans shop. While they are spending, they’re not returning to old patterns of behaviour. “It’s more about need, more about value, and not about the frenzy of buying,” said John Long, retail strategist at consulting firm Kurt Salmon Associates.
The nascent economic recovery means that Americans who have jobs are less worried about the prospect of losing them. “That allows them a degree of comfort to go out and buy the things they need, but that’s really about it,” Mr. Long said.
