Consumer currently accounts for 70% of GNP, up from 63% in 1980. Much of this increase can be attributed to the easy credit that we've enjoyed over the past few decades in the form of credit card spending and people using their home equity as a checking account.
In just the last four years, 34,000,000 households have taken money out of their homes --which amounts to 1/3 of homeowners spending the precious equity they've accumulated. This means they're borrowing heavily "to finance their day-to-day lives.
It's now time to pay the piper as lending institution across the U.S. are tightening up on credit standard both in secured home loans and unsecured credit cards. Because of the evaporation of easy credit, consumers are now heading to Wal-Mart instead of Nordstroms. Conspicuous consumption is giving way to trying to making one's dollar go the furthest.
Credit counselors report that they are receiving desperate calls from not only people of modest means, but also people who earn six-figure incomes. These high wage earners are disillusioned as they don't know how to exist without easy credit. They've maxed out both their credit cards and mortgaged their home to the hilt, and they don't know what else to do now that they can no longer shop until they drop.
Extravagance in consumer spending has resulted in people placing less money in savings. In 1984, American saved 10% in what they earned. Ten year later, it was down to 5% and today the savings rate is
negative.
Americans now must do something they haven't done in recent years: live within their means. This is due to the high number of jobs being lost, rapidly falling housing prices, and financial institutions cutting off life support to easy credit. Since people are now being challenged to live within their means, many are also realizing that they need to increase what they save and put in the bank--something they haven't done for a long, long time. According to Chief Economist for Lehman Brothers, Ethan S. Harris, "The long collapse in the United States saving rate is over... People are going to start saving the old-fashioned way, rather then letting the stock market and rising home values do it for them."
Two realities have now merged into one: 1) The savings rate in the U.S. is now increasing instead of decreasing as it did the past 30-plus years. 2) Easy credit is quickly vanishing from the American landscape.
The problem is this, consumer spending is the main driver of our economy. With a society that will now be socking away more money into the bank and actually planning for the future and using far less credit; there will be less spending which is the primary component of economic growth.
In coming months, we will be in for a shock as the free-wheel spending and easy credit that allowed even Americans of modest means to occupy McMansions and drive expensive gas-guzzling SUVs comes to a crashing halt. Folks, the party is over.
http://www.nytimes.com/2008/02/05/business/05spend.html?pagewanted=2&_r=1&ref=todayspaper
