For once, spending like there is a tomorrow
Posted by metaphorical on 3 November 2008
A consumer-led recession is upon us, and it
promises to be a serious one.
— Josh Shapiro, chief economist at MFR,
a global consulting firm
I’ve been listening to Planet Money, NPR’s daily podcast follow-up to their two wildly, and deservedly successful This American Life episodes devoted to the world financial meltdown. (If you’re one of the three people on earth who missed them, they’re The Giant Pool of Money and “Another Frightening Show About the Economy”.)
There’s a weird thing going on at Planet Money, where they call in expert economists, analysts, and investment gurus to explain what’s going on. To a person, they say, “buy more stuff.” The NPR staffers themselves also continually exhort us to buy more stuff.
If people stop buying, the economy will crash, jobs will be lost, and people won’t have the money to buy anything. So the creepy idea, which they acknowledge, is that the common good dictates we all engage in a behavior that, everyone seems to understand, is individually risky and arguably incredibly stupid, which is to stop saving money for a rainy day when you can already see the lighning and hear the thunder.
That people have stopped spending is undeniable.
The economy as a whole is already off by 0.3% in the last quarter, led by a killer 3.1% decline in consumer spending. Bloomberg reports that that’s “the first drop since 1991 and the biggest since 1980, after President Jimmy Carter imposed credit controls.”
Online spending is also sharply down, according to Comscore. On a monthly basis, online consumer spending growth has declined for five consecutive months. September’s 5 percent growth rate was the smallest increase since comScore starting tracking e-commerce sales in 2001.
And the reasons people have stopped spending seem pretty obvious. People are terrified they will lose their jobs, or their spouses will lose their jobs, or their aging parents will lose their jobs, or their kids just entering the workforce will have to move back home because they lost their jobs or never got one in the first place. A story yesterday asks, quite plausibly, Will US Unemployment Hit 10%? The most recent figure is 6.1% and, as the article notes, will certainly have risen to about 6.3% when the October numbers come out. And that’s taking the government’s bogus numbers at face value. A government-certified 10% would of course be as much as twice that in real life.
The obvious next question, which people haven’t yet really started to ask, is, If people are not spending money in general, what about the Christmas shopping season? If holiday spending falls off a cliff, might that not be enough to push us from recession to depression (if we’re not already headed there anyway)?
An article in today’s NY Times notes, almost parenthetically, that a bunch of big retailers are already in bankruptcy, including Mervyn’s and Linens ’n Things. The focus of the article, Debt Linked to Buyouts Tightens the Economic Vise is that
Private equity firms embarked on one of the biggest spending sprees in corporate history for nearly three years, using borrowed money to gobble up huge swaths of industries and some of the biggest names — Neiman Marcus, Metro-Goldwyn-Mayer and Toys “R” Us.
The new owners then saddled the companies with the billions of dollars of debt used to buy them. But now many of the loans and bonds sold to finance the deals are about to come due at the worst possible time.
That comes in the face of news that Circuit City plans to close 155 of its 700 stores, which broke later today, and some truly grim auto sales figures, led by GM’s “incredible 45 percent decline in its sales.” Even Toyota and Honda were off by about 25%.
Of course, GM’s financing arm, GMAC, is owned by private equity, so there’s a double-whammy all its own. Speaking of which, private equity firm Apollo Management, which owns Linen’s ‘n Things, also owns Century 21, which surely would be in trouble anyway with the real estate market in a deep freeze.
You can just imagine what effect that news will have onconsumer sentiment which is already badly shaken.
The Reuters/University of Michigan index of consumers sentiment dropped from 70.3 in September to 57.6 in October. The measure, in which the larger the number. the greater the confidence, averaged 85.6 last year.
In a further dose of gloomy economic news, the Institute for Supply Management-Chicago reported that its index — a gauge of employment and demand — fell from 56.7 in September to 37.8 in October.
The stories in the news right now are about stores preparing to woo customers for the holidays.
U.S. Retailers Use More Creative Techniques In Attracting Holiday Bargainer Hunters (buried within this one is this little tidbit: “Home Depot and Sears Holdings expect an 8 percent reduction in their holiday sales this year.”)
But with consumer confidence already at an all-time low and surely headed lower, can’t we just cut to the chase and picture businesses going out of business left and right this winter?
Because the fact is, Christmas spending is about more than just gifts, people buy stuff for themselves, not least because end-of-year bonus checks go both ways. As Paul Krugman pointed out the other day, buried within the steep 3.1% decline in consumer spending is a plummet in spending on big-ticket items: “real spending on durable goods (stuff like cars and TVs) fell at an annual rate of 14 percent.”
To appreciate the significance of these numbers, you need to know that American consumers almost never cut spending. Consumer demand kept rising right through the 2001 recession; the last time it fell even for a single quarter was in 1991, and there hasn’t been a decline this steep since 1980, when the economy was suffering from a severe recession combined with double-digit inflation.
Also, these numbers are from the third quarter — the months of July, August, and September. So these data are basically telling us what happened before confidence collapsed after the fall of Lehman Brothers in mid-September, not to mention before the Dow plunged below 10,000. Nor do the data show the full effects of the sharp cutback in the availability of consumer credit, which is still under way.
So this looks like the beginning of a very big change in consumer behavior. And it couldn’t have come at a worse time.