Consuming Doubts
Consumers have been carrying the economy on their shoulders like a circus strongman, snapping up new houses, refinancing the old, keeping retail store cash registers beeping and polishing new sport utility vehicles parked in the driveway. But there are troubling signs that propping up the struggling economy might be hazardous to consumers’ long-term financial health.
The shopping spree has floated on low inflation, consumer-friendly tax policy and low-cost financing. And when consumers run out of money, they have taken advantage of the lowest interest rate levels in decades to secure home loan refinancings that free up additional cash.
Consumer spending drives two-thirds of the nation’s economic activity and largely has been countering the gap created by a lack of business investment. The automobile industry this year could challenge 2001, the second-best sales year on record, and rising housing prices have some economists worried that a pricing bubble is about to burst.
Statistics, though, paint a worrisome picture of increasingly overextended consumers. Housing payments, when measured as a percentage of disposable personal income, are at record highs. Toss in credit cards and other obligations and consumers are spending a record percentage of their household income on debt. Homeowners who’ve lost jobs and missed payments have pushed the foreclosure rate on residential properties to the highest level in more than 50 years.
One measure of consumer confidence is the popularity of interest-only home loans, with low interest rates for the first few years and lower monthly payments because payments initially are applied only to interest, not principal. Homeowners playing this risky game hope prices go up, so they can sell for a handsome profit after a few years of low payments. The risk is that they could also end up owing much more than their homes are worth.
Billions of dollars flowing into vacation homes, Las Vegas getaways and kitchen renovations also come at the expense of college education funds, rainy day savings accounts and retirement planning. But there are signs that the “what, me worry?” attitude is starting to fade.
The University of Michigan in August reported that its widely watched consumer survey uncovered more concern about lost household wealth than at any time in the survey’s 50-year history.
Total bankruptcy filings during the fiscal year ended June 30 hit 1.5 million, breaking the record set in 2001.
Optimists say the economy’s strongman can use wealth accumulating in homes to keep the performance going indefinitely. But that sounds suspiciously like the stock market logic that pushed “irrational exuberance” into the lexicon. And as Federal Reserve Chairman Alan Greenspan recently noted, it’s difficult to identify a bubble until after it bursts.
