Consumer Blues
August 30, 2006
By: Michael Bovee, Consumer Recovery Network Specialist
With 70% of our U.S. Economy driven by consumption, what will happen when there is a cutback, of any proportion, in consumption? And, at what point does a slight reduction in our over consumption in this country beget an increased snowball type momentum of an already apparent slowing economy?
The following quote from a recent Reuters article titled, "Consumer Confidence Slides to 9-month Low", provides some perspective.
“The Conference Board said its consumer confidence index tumbled to 99.6 in August, from an upwardly revised 107.0 the prior month.
That was the lowest reading since November 2005 and fell well short of Wall Street's 103.0 forecast. It also marked the largest one-month decline seen since September 2005, in the aftermath of Hurricane Katrina.”
Perhaps it is time for some different prescription glasses as the rose colored ones are not working as well.
What if folks stay home more and hold back from purchasing more doodads and doohickies? What if the inbound and distressed housing bubble flight, projected by some to come in for a soft landing, were to miss the runway all together? This could prove to be quite meddlesome for some projections being made that the economy will continue with less, but still some, growth.
Bill Bonner says, in his recent article, US Housing in Trouble:
"The boom has lifted the US economy in three ways: it has boosted residential construction, it has made people feel wealthier and so encouraged them to spend more, and it has allowed homes-owners to use their property as a gigantic cash machine, taking out money by borrowing against their capital gains. Merrill Lynch estimates that the three together accounted for more than half of America's total GDP growth since last year.
Counting construction, finance, and estate agency, the US housing boom has been responsible for one-third of all the jobs created since 2001. If house-price rises level off, GDP growth could dip below 2% in 2007. If prices fall, expect a steeper slowdown."
The typical U.S. household is in negative financial territory. Meaning, most Americans, in general, spend more than they earn. Where does the extra money come from to fund this over consumption? Credit funds it. Whether it is revolving credit cards, cash out refinancing, home equity loans, or 2nd mortgages. It’s borrowed money. This onslaught of borrowing and easy credit has fueled the economy along for several years. Many of us have been good little consumers and done our part in helping the consumption driven economy to keep its engine running and fully fueled. But, does it make sense to have a negative savings rate? Does it make sense to buy stuff using credit that you pay interest on that automatically increases the price of what you just purchased? At what point does this all just add up to a huge drain on you, your time, and your quality of life?
With consumer sentiment dropping, a negative savings rate, a housing market that is cooling off (at best), and home owners no longer able to use property appreciation as fuel for further consumption, perhaps it would be wise to get our financial house in order.
At Consumer Recovery Network (CRN), I interact and assist consumers, daily, that are distressed and at the tail end of the “more money going out than coming in” scenario that plagues the average American household. The purpose of this article is not to paint a gloomy economic picture - that canvas is full. Those of you reading this that are strapped and financially strung out already know it. The purpose is to raise awareness that just as a household cannot survive by spending into debt, a debt driven economy cannot go on forever.
If you are living within your budget and it allows for savings and you're either debt free or paying down debt at an accelerated pace, more power to ya. While you're at it, take a stroll next door, wake up your neighbors, and let them in on your secret.
By: Michael Bovee, Consumer Recovery Network Specialist
With 70% of our U.S. Economy driven by consumption, what will happen when there is a cutback, of any proportion, in consumption? And, at what point does a slight reduction in our over consumption in this country beget an increased snowball type momentum of an already apparent slowing economy?
The following quote from a recent Reuters article titled, "Consumer Confidence Slides to 9-month Low", provides some perspective.
“The Conference Board said its consumer confidence index tumbled to 99.6 in August, from an upwardly revised 107.0 the prior month.
That was the lowest reading since November 2005 and fell well short of Wall Street's 103.0 forecast. It also marked the largest one-month decline seen since September 2005, in the aftermath of Hurricane Katrina.”
Perhaps it is time for some different prescription glasses as the rose colored ones are not working as well.
What if folks stay home more and hold back from purchasing more doodads and doohickies? What if the inbound and distressed housing bubble flight, projected by some to come in for a soft landing, were to miss the runway all together? This could prove to be quite meddlesome for some projections being made that the economy will continue with less, but still some, growth.
Bill Bonner says, in his recent article, US Housing in Trouble:
"The boom has lifted the US economy in three ways: it has boosted residential construction, it has made people feel wealthier and so encouraged them to spend more, and it has allowed homes-owners to use their property as a gigantic cash machine, taking out money by borrowing against their capital gains. Merrill Lynch estimates that the three together accounted for more than half of America's total GDP growth since last year.
Counting construction, finance, and estate agency, the US housing boom has been responsible for one-third of all the jobs created since 2001. If house-price rises level off, GDP growth could dip below 2% in 2007. If prices fall, expect a steeper slowdown."
The typical U.S. household is in negative financial territory. Meaning, most Americans, in general, spend more than they earn. Where does the extra money come from to fund this over consumption? Credit funds it. Whether it is revolving credit cards, cash out refinancing, home equity loans, or 2nd mortgages. It’s borrowed money. This onslaught of borrowing and easy credit has fueled the economy along for several years. Many of us have been good little consumers and done our part in helping the consumption driven economy to keep its engine running and fully fueled. But, does it make sense to have a negative savings rate? Does it make sense to buy stuff using credit that you pay interest on that automatically increases the price of what you just purchased? At what point does this all just add up to a huge drain on you, your time, and your quality of life?
With consumer sentiment dropping, a negative savings rate, a housing market that is cooling off (at best), and home owners no longer able to use property appreciation as fuel for further consumption, perhaps it would be wise to get our financial house in order.
At Consumer Recovery Network (CRN), I interact and assist consumers, daily, that are distressed and at the tail end of the “more money going out than coming in” scenario that plagues the average American household. The purpose of this article is not to paint a gloomy economic picture - that canvas is full. Those of you reading this that are strapped and financially strung out already know it. The purpose is to raise awareness that just as a household cannot survive by spending into debt, a debt driven economy cannot go on forever.
If you are living within your budget and it allows for savings and you're either debt free or paying down debt at an accelerated pace, more power to ya. While you're at it, take a stroll next door, wake up your neighbors, and let them in on your secret.
