Is the Economy Being Billed for Buying Spree?
What’s really wrong with this economy? Even with all the stimulus it’s getting from the government’s deficit spending, from a Federal Reserve willing to pump lots of money into the system and from falling oil prices, it simply isn’t taking off. Consumers aren’t breaking down the doors to buy things.
It’s always difficult to predict or explain consumer behavior, but one reason the spending public has become a harder sell seems pretty obvious. It has to do with all of the things that individuals have already bought and the pieces of plastic that they used to do it with. Credit card balances have been getting heavier and, except for the fact that bankers keep sending them more cards and approving more credit, often without being asked, consumers might well have curtailed spending earlier.
Some economic forecasters are worrying--and for good reason. Last year, consumer debt was 18.2% of disposable income, a sharp one-year jump from 15.9%, a level that had been constant for four years. Equally troubling, 10.4% of income now goes to making payments on all of that debt, double the figure of 15 years ago. It would be worse except for the recent drop in interest rates. The problem goes deeper than that. Until inflation became a major problem in the last decade, easy credit produced a lot of economic growth. Prosperity spread downward, lifting many lower-income people into the middle class, adding further to the potential for spending.
When inflation took off, however, and ultimately propelled the nation into a severe recession, that all changed. Suddenly, spendable income began shrinking, and, even today, it’s tougher than it was to climb the economic ladder. Good jobs don’t seem as secure as they once did. Big companies are still cutting back on their payrolls, trying to fatten profits by cutting costs now that they can’t get away with regular price increases.
Now Saving Less
It’s true that until now, consumers haven’t displayed much propensity to save. In fact, they put away less than 5% of their income last year, only two-thirds of the 1984 share. But it’s likely that some people are worrying more these days about having enough money in the future. They’re less certain that Social Security will be as generous for them as it is for today’s pensioners and aware that with longer life spans, they’ll have to finance many more years of retirement.
In the face of all this, retailers and makers of consumer goods keep right on trying to push sales growth. But the fancy catalogues and other merchandising efforts don’t move products as well as they once did. Retail sales have been flat. It takes almost year-round cut-price deals to keep things going. Department stores have found that to be true even in December. Auto makers have discovered that they can keep sales up only by slashing interest rates on car loans--and even that isn’t working as well as it did last year.
To some extent, the simple lack of inflation has made consumers a lot more patient about buying things. They figure that if they wait, the price may go down. But there appears to be more than that. Consumers may want a respite from all the spending.
Maybe with all that plastic, they realize they got ahead of themselves. Obviously there are a lot of people in this society with a long list of things they want to buy when they can. But there are many others--their homes already filled with gadgets gathering dust, their garages already housing a couple of expensive cars--who aren’t so hungry.
It’s a phenomenon the economy has seen before. Back in the 1950s, when the auto makers began to significantly lengthen the pay-back period on loans, sales soared to records, only to collapse when the market got oversold. In effect, by making credit easier, the industry was effectively borrowing from future sales.
Back then, such practices led to a recession. If much the same thing has happened now--to autos and other lines as well--does that also spell recession? Not necessarily. But it may mean that the economy will remain stubbornly resistant to faster growth, no matter what the government and the Federal Reserve do.
