Consumer spending

[Architect]

People have been bandying around the death, or not, of the U.S. consumer. I believe that the consumer is indeed in a secular retrenchment, and have been studying the idea the past two years, as part of my research into lucrative investing over the next decade.

I won't post all of the data, some of it is proprietary, and otherwise it's too much bother. The figures are approximate as they're from memory, but here is the result of my research for your enjoyment.

This assumes a US spending spree which started around 1982, and is presumed to have finally capitulated in 2008

1. Average baby boomer (ABB) has saved (pre 2008 crash) $46k for retirement. Very few take advantage of tax advantaged saving, like 401k's and ROTH. Figures aren't handy, but predominately when somebody quits a job they cash out what is in the 401k.
2. ABB has majority of wealth tied up in house, >70% of americans 'own' their home, which value is now crashing. Houses which are owned outright are only around 15%.
3. ABB can't expect much in inheritance. Average inheritances have been around $40k, hardly a princely sum, and they go mostly to the already wealthy (wealthy parents tend to have wealthy kids). With longer lifespans, medical costs and greater charitable giving there's no boom in inherited wealth.
4. Since 1982, spending (and thereby credit accumulation) has outpaced income by about 2% each and every year. Now the savings rate (however you want to measure it) is approximately zero. This is a very unusual situation, few countries maintain this situation for long. This one is in trouble from both ends, the credit giving and the credit taking.
5. An in depth study I have of consumer wealth - after the dot.com/2008 crashes, and the housing crash, there's very little wealth left to tap to fuel spending. The last big piece consumers have, a few trillion in pension type monies, is in conservative hands and difficult to get at. Otherwise there's little to continue the spending spree, little in savings or, especially now, asset values.
6. What wealth you do see out there is, guess what, concentrated at the top. Having $1M+ in assets places you in the top 10%.
7. Demographically, there's a lot of data which clearly shows a spending slowdown when a person gets to their 50's. One, kids are/have moved out, so there's no more household building. Two, the next goal is retiring. Three, people have everything they need, or nearly. Four, people just want less generally. ABB is getting well into their 50's now, and they have been the big spenders the past few decades, what else do they need?
8. MEW - Mortgage Equity Withdrawel, has been funding spending since 2000. Lots of data here, but that source has been cut off. Previously it was the dot.com boom.
9. Credit crisis. After the biggest credit bubble the world has ever enjoyed, bankers are suddenly turning into Ebenezer Scrooge, and is withdrawing credit.

There's more, but that gives you a taste. Finally, something I've noticed about the ABB, is that they tend to overdo things. I have a hunch they might take to frugality in a big way, and then act like they invented it.

Seems unlikely, but so did the credit crises last year, didn't it? Shoot away ...

 

[LOL!]

I'm glad I'm not one of your ABBs. LOL!

 

[Architect]

I'm glad I'm not one of your ABBs. LOL!

no kidding. I doubt anybody here is, you folks are exceptional.

 

[UncleHoney]

I was the oldest of six very early BB's (46 vintage) at the old salt mine. Only two of us have retired so far and I'm the only one not working. The other one is doing a little "consulting" to make ends meet and pay off his HELOC. In his words, "I really cant afford to retire", but did so for health reasons.

Of the six, I was without doubt on the low end of the salary range. I'm sure most of the others made about 1.5+ times what I made........... and spent it too.

I hope they enjoy the early morning drive in the snow tomorrow, I don't do early commutes anymore.

As for the dying spenders....YEP. they're going to be busy paying off debt and saving for retirement.

 

[UncleHoney]

If you take the fact that 70% of the GDP is consumer spending and subtract whatever portion of that spending was supported by debt, what do you get?

Now subtract a little more due to a possible increase in savings and what do you get?

You probably get just what we've got, a big mess.

This is the part that may be the "difference" in "this time it's different".

 

[dex]

I think there is/will be a slow down in consumer spending next year but I do not think it signifies a change in consumer behavior. To accomplish a change in behavior there would need to be a significant and prolonged downturn. Failing that, people will spend less as the avg. age in the USA get older. But even that will be muted in the USA due to immigration.

You've done a lot of research on the financial aspects of the subject. I'm thinking about it from the psychological point of view - not asset change/debt.

The changes that you point to are have been a slow grind that people don't notice, think about or realize it is a problem.

U.S. Unemployment Rate Forecast

Unemployment rate is just crossing 6%

washingtonpost.com

Spending is up 3% this holiday season so far.

 

[Architect]

I think there is/will be a slow down in consumer spending next year but I do not think it signifies a change in consumer behavior.

What's amazing is how well consumers have stood up over the years. 9/11 should have been the final blow, but the 'buy and fly' campaign worked too well, then housing gave them the green to keep going. But surely you can't expect that they can continue to out spend their paychecks by 2% forever, do you? Nothing grows to the sky forever, not house prices, pets.com, nor spending.


More fuel for the fire, Meridith Whitney is a brilliant banking analyst, she called the banking sector implosion long before anybody else did in the industry.

Credit card industry may cut $2 trillion of lines: analyst - Yahoo! News

 

[samclem]

Okay, okay. The hook has been set. What's an investor to do? If US consumers won't be spending for a decade or so, which assets will go up in value? Which companies will do well?

Three other observation:
-- The points you've posted address US consumers. There are other consumers in the world with high savings rates. It is possible that some US companies with a competitive advantage could still do well by selling to these folks. (Boeing?)
-- There's still one big line of credit consumers can tap: Uncle Sam's. The floodgates are open, and he'll be providing rope consumers can use to hang themselves (or lower themselves further down the well) all in the name of stimulating the economy. Advisors to the new administration are calling for a 'really big jolt." Some of that cash tidal wave will go to contractors, but eventually it will go to wages, which will allow more (leveraged) spending. Also, anticipate more easy credit (low rates and reduced underwriting) as part of the "jolt." Sure, those policies are exactly what got us into this situation, but this will be just a little "hair of the dog" to help with the hangover. Until tomorrow.
-- The US consumer's psyche hasn't changed. The personal and cultural crisis hasn't hit. An alcoholic often must hit "rock bottom" to see the situation as it is and resolve to make changes, without this significant emotional event the damage just continues. The attitudes and behavior of our parents/grandparents were deeply affected by the bread lines and 25% unemployment of the Great Depression and the national crisis (including impacts on the home front) of WW II. There's nothing in our present experience to cause a shock and a significant change in attitudes.

Thanks for the post.

 

[freebird5825]

...the death, or not, of the U.S. consumer...
This assumes a US spending spree which started around 1982, and is presumed to have finally capitulated in 2008


- Since 1982, spending (and thereby credit accumulation) has outpaced income by about 2% each and every year. Now the savings rate (however you want to measure it) is approximately zero. This is a very unusual situation, few countries maintain this situation for long. This one is in trouble from both ends, the credit giving and the credit taking.
- Credit crisis. After the biggest credit bubble the world has ever enjoyed, bankers are suddenly turning into Ebenezer Scrooge, and is withdrawing credit.

sorry about the hacking up of the post...
it is about time the credit industry woke up. a common phenomenon i see here in the backwaters of Nowhere NY are very dilapidated houses (IMHO a valid indicator of household income) but there sits that brand new 4x4 pickup, or 2 new snowmobiles olus double trailer, or similar big ticket items in multiples in the driveway.
my county has a very high seasonally unemployed and public assistance population. yet the expensive toys are a normal thing to see.
dh2b and i can't afford these things on 2 moderate incomes and remain debt free. HUH

 

[Nords]

People have been bandying around the death, or not, of the U.S. consumer. I believe that the consumer is indeed in a secular retrenchment, and have been studying the idea the past two years, as part of my research into lucrative investing over the next decade.

So what's your conclusion? Where would you invest?

What if consumers are in a retrenchment-- is it significant or long-term? I understand that a bunch of big scary numbers have been assembled in the context of getting worse over time, but how does this compare to the 1970s or earlier? Is this a blip, a sine wave, or a life-changing trend? I have a hard time believing that globalization and cheaper overseas production costs can be trumped by a minor little problem like rising consumer debt. I suspect that the result will be some version of "muddle through", not permanent abandonment of a materialistic lifestyle. We won't all be driving Hummers but I don't think that SUVs or pickup trucks will vanish from the roads over the next 20 years.

Analysts prognosticate about Boomer retirements as if it's a cataclysmic tsunami. Yet 78 million people aren't retiring tomorrow, and some of them will never retire. Over a 25-year period it works out to about three million a year. I don't know how significant that is compared to today's U.S. population, but I doubt we're going to see the "retirement rush" from equities to Treasuries that was widely predicted over the last 10 years.

And I doubt we're going to return to 1970s barter clubs & bicycle commuting, either.

What I do think is that people are going to keep spending until they run out of money. They they're going to keep working to get more money. Some of them will work until they die, and others will figure out how to live on Social Security deposits. But I don't think that people's spending habits will permanently change, any more than similar sectors of the population will stop consuming more calories than they use, drinking too much alcohol, or smoking cigarettes.

I suspect that stocks in those demographics will continue to make money, too, even if they're killing off the customers...

 

[al_bundy]

how many baby boomers get a pension from a government source or one of the few private companies that still pay out pensions? i've seen first hand that you can own a home outright, have very little saved and still live OK on SS.

if you have a government pension you really don't need to have your own retirement account.

 

[Architect]

Taking your first point, unfortunately the US consumer is the consumer of any resort. I have research which looks at overseas consumers, and none of them is as yet willing and able to take the place of the US. Certainly not the E.U, and China doesn't yet have a big enough middle class to shoulder the burden. Simple test - open up the back page of The Economist. Look at the international trade flows (a single table). Where does everything flow to?

On your third point, sure if they had access to more credit they would gorge. But sentiment doesn't count much anymore I think. Just an observation, but desire and ability are presently diverging.

Combing the other points - how is one to invest? You're dead on about the Fed trying to induce borrowing - but how? By moving up the yield curve, which would lower borrowing costs for things like cars and dishwashers. Quantitative Easing in other words, which they just quietly begun doing last week. With the results that long term Treasury bonds are continuing to rally.

The best way to invest, in my small opinion, is to

• preserve capital (minimum)
• buy again when stocks are cheap (better)
• meanwhile own long Treasury bonds (best)

It's too tough to try to game any other asset class in an environment like this. Crazy talk, I know, but the gains in the long bond from 5% to the present have been pretty good.

Okay, okay. The hook has been set. What's an investor to do? If US consumers won't be spending for a decade or so, which assets will go up in value? Which companies will do well?

Three other observation:
-- The points you've posted address US consumers. There are other consumers in the world with high savings rates. It is possible that some US companies with a competitive advantage could still do well by selling to these folks. (Boeing?)
-- There's still one big line of credit consumers can tap: Uncle Sam's. The floodgates are open, and he'll be providing rope consumers can use to hang themselves (or lower themselves further down the well) all in the name of stimulating the economy. Advisors to the new administration are calling for a 'really big jolt." Some of that cash tidal wave will go to contractors, but eventually it will go to wages, which will allow more (leveraged) spending. Also, anticipate more easy credit (low rates and reduced underwriting) as part of the "jolt." Sure, those policies are exactly what got us into this situation, but this will be just a little "hair of the dog" to help with the hangover. Until tomorrow.
-- The US consumer's psyche hasn't changed. The personal and cultural crisis hasn't hit. An alcoholic often must hit "rock bottom" to see the situation as it is and resolve to make changes, without this significant emotional event the damage just continues. The attitudes and behavior of our parents/grandparents were deeply affected by the bread lines and 25% unemployment of the Great Depression and the national crisis (including impacts on the home front) of WW II. There's nothing in our present experience to cause a shock and a significant change in attitudes.

Thanks for the post.

 

[dex]

But surely you can't expect that they can continue to out spend their paychecks by 2% forever, do you? Nothing grows to the sky forever, not house prices, pets.com, nor spending.

I agree with your numbers and inferences on a financial macro level.

But a long term retrenchment or change in spending behavior would only be changed by the items I mentioned above.

The credit squeeze in the article might happen but it will also be loosened again when the credit card companies think it is safe to do so.

You might consider adding consumer sentiment information to the information you gathered to add a psychological aspect to the picture.

I find this info interesting. A reduction in credit lines might not affect many people.
The truth about credit card debt - MSN Money

The surprising thing about this statistic isnt that its so widely known. Rather, its that the statistic paints a picture thats just plain wrong.

• In reality, most Americans owe nothing to credit card companies.
• Most households that carry balances owe $2,000 or less.
• Only about 1 in 20 American households owes $8,000 or more on credit cards.

++++++++++++++++++++
I'd suggest if you are looking for where consumer spending will increase - look towards Asia - young population and becoming affluent.

Generally, for investing look outside the USA.

 

[Nords]

The best way to invest, in my small opinion, is to

• preserve capital (minimum)
• buy again when stocks are cheap (better)
• meanwhile own long Treasury bonds (best)

Studying the techniques of the last 75 years of value investors like Graham, Dodd, Fisher, Schloss, Buffett, Ruane... would have saved you a lot of research on consumer spending.

 

[ziggy29]

The best way to invest, in my small opinion, is to

• preserve capital (minimum)
• buy again when stocks are cheap (better)
• meanwhile own long Treasury bonds (best)

In other words: Buy stocks when they are cheap and buy Long Treasuries when they are bubble-priced?

And yes, I do think there is a bubble in this market. It's moved from dotcoms to housing to commodities to Treasuries.

 

[samclem]

The best way to invest, in my small opinion, is to

• preserve capital (minimum)
• buy again when stocks are cheap (better)
• meanwhile own long Treasury bonds (best)

- I agree with "1" if it means cut back on spending. If it means selling equities today, I don't think that's a wise move.
- I agree with "2", and can't help but think we might already be at the ppoint that stocks are cheap.
- "3": Not for me. With the risk of inflation as high as it is, buying long bonds is a very risky bet. They'd get hammered deeply. Unless you knew you'd be holding to maturity, I just can't see it--the present reward does not justify the risk..

 

[dex]

In other words: Buy stocks when they are cheap and buy Long Treasuries when they are bubble-priced?

And yes, I do think there is a bubble in this market. It's moved from dotcoms to housing to commodities to Treasuries.

At this moment there are several investments that are overpriced or in a bubble:
Treasuries
US $ - will get a stronger - then time to buy foreign exchange

Things to buy now:
High yield corp bond funds - average into it

Things to buy future - at a dollar spike - look back to 2001 for aprox prices:
Foreign currency
International stock funds - ex USA
Commodity funds -

 

[SteveL]

The conundrum of our retirement planning is that the non-retired portion of the population must support us. Assuming we have them, we have to be able to sell our stocks and bonds and houses and gold or whatever to the younger generations. The working population has to fund our SS and Medicare (as current legislated). Tax collections have to pay public pensions, and business income private pensions.

If we are retired and not contributing to society via work, then somehow, society supports us. Only a strong economy can support a lot of retirees.

 

[CuppaJoe]

....but how does this compare to the 1970s or earlier? Is this a blip, a sine wave, or a life-changing trend? I have a hard time believing that globalization and cheaper overseas production costs can be trumped by a minor little problem like rising consumer debt....

This brought back an odd memory. In 1974, I quit my govt. job of four years and moved cross country without a job lined up. Four years later a new friend, who happened to be from Hono, advised me that if I ever do that again, I should be sure to have applied for lots of credit cards in advance.

 

[ziggy29]

If we are retired and not contributing to society via work, then somehow, society supports us. Only a strong economy can support a lot of retirees.

And one where the ratio of supported retirees to taxed workers is not increasingly out of whack.

 

[NW-Bound]

So what's your conclusion? Where would you invest?

I have a hard time believing that globalization and cheaper overseas production costs can be trumped by a minor little problem like rising consumer debt.
...
What I do think is that people are going to keep spending until they run out of money. They they're going to keep working to get more money.
...
Some of them will work until they die, and others will figure out how to live on Social Security deposits. But I don't think that people's spending habits will permanently change, any more than similar sectors of the population will stop consuming more calories than they use, drinking too much alcohol, or smoking cigarettes.

A "minor" consumer debt problem? I thought every economist called it a major problem.

I hope Nords will turn out to be right, for my sake. But to hedge, same as Dex, I will look to invest more in US exporters as well as foreign companies that cater to the growing consumer bases in India and China.

About Americans who have to work till they drop, I hope society will create enough jobs for them.

 

[NW-Bound]

If we are retired and not contributing to society via work, then somehow, society supports us. Only a strong economy can support a lot of retirees.

An emphatic YES. And a strong economy needs workers!

In a much earlier thread that was condemned to the Soapbox, people were talking about how immigration should be curtailed as the boomers start to retire.

I thought we need to bring them in to do menial work, such as working in nursing homes taking care of us. In return for their labor, of course we have to exchange our possessions, our houses, and stocks. You cannot eat your cake and "take it with you" too.

Off topic:

In the news a while back, there was a story about a childless couple who willed their house to a non-related woman in return for the care that she would provide. They wanted a more personal care than what was customary in a nursing home. Still, I wonder how the quality of that arranged care could be assured.

 

[Architect]

Well it's too late now anyhow. One of my predictions from a year ago was that the Fed would start buying up higher on the yield curve. Guess what they announced today?

Calculated Risk: Bernanke: Fed may buy Longer-Term Treasuries

Well the Treasuries have been fun, especially now with the Fed on my side!

- "3": Not for me. With the risk of inflation as high as it is, buying long bonds is a very risky bet. They'd get hammered deeply. Unless you knew you'd be holding to maturity, I just can't see it--the present reward does not justify the risk..

 

[freebird5825]

...if you have a government pension you really don't need to have your own retirement account.

if you were at an SES level of pay, like a federal district judge or an agency head, or a member of Congress, i'll grant that one.
if you were a regular person, no way is a govt pension enough to live on.

 

[Gardnr]

I find this info interesting. A reduction in credit lines might not affect many people.
The truth about credit card debt - MSN Money

The surprising thing about this statistic isnt that its so widely known. Rather, its that the statistic paints a picture thats just plain wrong.

• In reality, most Americans owe nothing to credit card companies.
• Most households that carry balances owe $2,000 or less.
• Only about 1 in 20 American households owes $8,000 or more on credit cards.

I'm not sure how relevant this data is right now. It's hard to tell because it's not dated (which is very annoying), but that article is several years old. It cites data through 2002. There's been a lot of borrowing going on since then. But she did a [-]recycling[/-] reprise of this article in Jul '07 (that I found when trying to figure out when this one was written) - The big lie about credit card debt - MSN Money - with essentially the same conclusion, so maybe it's still valid. That data was thru 2004. Still not real current though.

I certainly hope so though.