One Year Later: The Vanishing American Consumer

(AP Photo/Seth Perlman)

This post by Richard Conniff originally appeared on CBS MoneyWatch.com.

There are plenty of good phrases to sum up the American consumer spirit of the past few decades — such as "Were you completely insane?" But what sticks in my mind is a bumper sticker I once saw displayed on a late-model Hummer hauling a trailer loaded with matching sparkle-painted $15,000 jet skis: "The one who dies with the most toys wins." I couldn't figure out why dying was key to the deal. But now I get it: There was no way that bozo could pay for so much crap in one lifetime — and his kids can't handle the bills either.

American consumers have awakened, bolt upright, with belated sticker shock ("I bought what!? I spent how much!?"), from a shopping spree that's arguably lasted since the early 1970s. That's when spending started to outpace economic growth, according to the federal Bureau of Economic Analysis. Credit cards proliferated. Easy credit based on rising real-estate and stock prices fed the delusion that we could go on consuming more than we produce forever. And it just got giddier after 1997, when consumer spending bubbled up from 67 percent to more than 70 percent of gross domestic product (versus 55 to 65 percent in more sober economies). "People are using their homes almost as a third income," an executive for a major lender told me in 2005, and she thought that was just fine.

Then real estate — and every other market — went bust and American household wealth dropped $14 trillion overnight. One year after the collapse of Lehman Bros., the investment bank that exemplified Wall Street's infatuation with borrowing, we're all learning to pay our accumulated bills with what we can earn from our first and second incomes, both of which seem likely to vanish at any moment. (Full disclosure: I'm a journalist and my wife is a real-estate agent. At least we didn't invest in buggy whips.) When consumer confidence came creeping back in August, the stock market fluttered upward. But the rebound took confidence only to midrecession levels. "Instead of being suicidal, it's just depressed," says Conference Board economist Ken Goldstein.

So the big question now is whether the American consumer, regarded as key to any recovery, is only temporarily missing in action. Or are we seeing a permanent shift in attitudes toward what we used to call "retail therapy"? Making it permanent could be a good thing for many badly strapped households — financially first of all, but also culturally, as people rediscover life beyond the shopping mall. But in an economy so dependent on consumer spending, that would be bad news for the recovery.

Companies Are 'Truly Panicked'

Scott Hoyt of Moody's Economy.com leans toward permanent change: "You'd have to go back to the Great Depression to see a decline as severe" as the 22 percent drop in household wealth that began in 2007, "and we know what the Depression did to consumer attitudes." (Let us pause to remember a generation that spread wet paper towels on the dish rack to dry and re-use.)

Marketing psychologist Geoffrey Miller, author of Spent: Sex, Evolution, and Consumer Behavior, doubts that consumers have changed all that much. But he says many of the companies he sees as a consultant are "truly panicked about what consumers might do in the future: How will premium brands keep making money? How can forward-looking companies overcome consumer skepticism?"

Harvard economist David Laibson does not offer much comfort to panicky marketers: "The consumer is actually right where she should be, thinking about how much money she lost and how much more she has to save if she's going to retire comfortably. I wouldn't call that fear. I'd call it good sense." With past spending so dependent on home equity, consumers are making "a permanent readjustment to the new reality that houses are worth 30 percent less."

Brookings Institution political scientist William Galston says households that have survived "a near-death financial experience" are already frantically cutting debt and building up their savings. If the savings rate stabilizes at 5 percent of income — below historic levels, but up from negative territory in 2006 — Galston figures households will have $600 billion less to spend annually. That spells the end, he says, to our unprecedented "orgy of personal consumption."

In my own household, the "new normal" means that my wife and I now bake our own bread (Jim Lacey's No-Knead recipe, instead of $4-a-loaf ciabatta), make our own granola (but maple syrup is a budget killer), grow some of our own vegetables, and even sometimes brew our own beer. And closing the circle of production and consumption has turned out to be a lot more therapeutic than shopping ever was. We bought a new car back in March, but only because the old one was 11 years old, and the price was right.

Three Ways to Boost American Jobs

But I suspect that a bigger change lies ahead. Most economists agree that it will take job creation to bring American consumers back into the marketplace. And that ultimately means Americans will need to redefine themselves not primarily as consumers, but as producers. Instead of going into hock buying stuff from China, we need to get back to making stuff the Chinese and other economies want to buy.

That will require policy changes, as well as individual enterprise. Here are three likely approaches:

Deregulation: Sherle R. Schwenninger of the New America Foundation argues for attracting manufacturers to this country by stripping out needless regulation and dropping the corporate income tax to 15 to 20 percent, down from as much as 35 percent now. The federal government also needs to aim infrastructure spending more carefully at improvements that make manufacturers more productive, he says — for instance, expanding U.S. natural gas capacity to replace dirty coal and expensive imported oil.

New China strategy: Economist Peter Morici at the University of Maryland argues for getting tough with China, which he says grabs a 40 to 50 percent profit advantage — and the jobs that go with it — by keeping its currency artificially low. The Obama administration has spoken out against currency manipulation, a phrase American officials diplomatically avoided in the past. But Morici worries that "they just don't have what it takes to deal with it. This economy cannot grow if they continue to permit the Chinese to victimize us on trade." The major technology shift away from fossil fuels is "all going to happen in China," Morici says, unless the Administration plays hardball now.

(AP)

Government aid to manufacturers: Sue Helper, an economist at Case Western University, believes companies are already starting to recalculate the real costs of outsourcing their manufacturing to China, including the loss of key technologies. Low wages were attractive at first, but "direct labor accounts for only 10 to 20 percent of manufacturing costs, and a lot of costs rise to get that cheap labor." She notes that General Electric chief executive Jeffrey Immelt, whose company helped lead the charge offshore, is now calling for the reindustrialization of America.

To grease the wheels of U.S. reindustrialization, Helper says the government should expand its Manufacturing Extension Partnership, which helps small- and medium-size manufacturers solve technical problems, much as the Agricultural Extension Service helps farmers. The difference, says Helper, is that agriculture accounts for less than 1 percent of gross domestic product and 2 percent of the workforce, but gets $430 million a year for its extension service. Manufacturing accounts for 14 percent of GDP and 10 percent of all jobs — but gets just $90 million. Shifting money to where it can produce the best return for the economy "could easily pay for itself in increased tax revenues."

There is of course an irony in all this. The companies now in a panic about the vanishing American consumer are in many cases the same companies that shipped American jobs overseas. And now they worry that Americans can no longer afford their imported products? Well, gee, who would've thought? Maybe we should just stay missing for a little while, holding onto our pennies and letting them stew over that thought — until they bring back the jobs.

Meanwhile, here's a motto for muddling through the hard times, to replace that bumper sticker about "the one who dies with the most toys." It's what rock musician Warren Zevon said when asked what his own imminent demise from lung cancer had taught him about life: "How much you should enjoy every sandwich."

It turns out that you can enjoy that sandwich just fine, even if it's only peanut butter for now, and even if you have to make it yourself.

More from CBS MoneyWatch.com:

Can Americans Really Stop Spending?
One Year Later: Remembering the Meltdown
What's Next: 4 Big Predictions for the U.S. Economy
Experts Talk: What's Next for the Markets?

[daisyjingles]

Recently, I have been looking for signs from the economy as to how well we are doing. As the economy sank, I saw great deal of deferred spending going on for my family, neighbors and friends as people struggled to survive the recession and most of those big item needs did not disappear, they will simply be met when people have more to spend.

Families have pared down expenses by trying to get only absolutely essential items that are needed to keep us alive and a roof over our heads. Among the first things we stopped doing was going out to a movie and dinner or getting our pets groomed, vaccinated and so on; next, we stopped going to the car wash. Then we stopped going out for dinner on Friday or ordering Pizza delivered. Soon, somebody on the block put a for sale sign on their extra vehicle. You know, the one their kid drove before he or she moved out and which is parked on the lawn or driveway. Of course now the kid is back home because he or she cannot afford apartment living (lost their job delivering pizzas). Sometimes they put off formalizing a business deal or writing their Wills or getting a Power of Attorney done that really should be done before somebody or some situation gets worse. People with good credit cannot buy the home they need unless they will take an adjustable rate mortgage, a financing tool that we now all know is like begging for an ice pick in our eyes.

Next, they put off going to the doctor ('He will just say it is a virus') or dentist for themselves so there is enough for the kids to go. They put off personal grooming expenses and cancel hair appointments.They put off starting a new business and they do not buy an anniversary diamond ring or new carpet or new furniture or new clothes. Instead, They look for such items on eBay or at a neighborhood garage sale or on Craigslist.com. The daughter is asked to find a homecoming dress on sale someplace.

Looking for improvement in the economy is similar to looking for signs of Spring and the good news is we have starting seeing signs of recovery. I saw a car go to a car wash the other day. There was no line, but there was one car. And I am going to order a pizza.

Stuff is getting better!

[pepperwood2]

One Year Later: The Vanishing American Consumer ..... As a American Consumer I'm still here. Prices all around me are going out of sight in favor of the Retailers, Big Oil, Energy, Food, etc. Banks, Auto, Oil, Energy, Medical companies are posed to make record profits.

All Obama & his Elite Czars of Nottingham can do is sit back and watch the Consumer struggle with these out of control prices. Just where is the American People suppose to come up with the money to rescue this economy??

Obama & Geitner think that we the people are delighted with their Spend & Tax The People Agenda, Our National Debt & Our Personal Debt hanging over our heads and will rush out to Spend, Buy, Charge, Borrow like we did before. Well guess what, We The People together are making those Changes he can count on. Until prices become affordable the best buys right now are the ones we don't make. Don't blame us. I for one, have to down size, cut costs, & try to balance my budget that won't budge. I would suggest that its time for These Elite Out of Touch Tax & Spend Bureaucrats to start by doing the same thing that The People have to resort to. From day one they just haven't gotten it. The CHARGES we can count on. So Sad!

[SkirtLifter]

by tincup356 September 14, 2009 7:25 PM EDT
It would seem as if the co conspirators Of the lobby robbery forgot one thing,,,,If they bankrupt the majority of the citizens,,,,,who will have money to but their products?
__________________
They didn't, ""forgot one thing,,,,"". It was a calculated raping of America. Big bonuses will continue until the complete bust of our economy. Get it while you can they say. Corporate America knows they are putting their customers out of work, they don't care. When no one has any money buy anything, the American factories will already have been closed for years.

We are running on credit and have been for awhile. After the trillions of newly printed dollars used to 'inflate' Wall Street cause the impending 'inflation' cycle (duh), Walmart and Nordstroms will have equal price points. Your worthless saving dollars, IRA's, 401K's, etc will be, well ... worthless.

If you invest in gold (15% of your portfolio is probably mandatory) own metal, not contracts. Some people say ammo is the new currency. I hope it doesn't get that bad.

[tincup356]

It would seem as if the co conspirators Of the lobby robbery forgot one thing,,,,If they bankrupt the majority of the citizens,,,,,who will have money to but their products? I guess the two great parties and corporate America forgot, that if the people don't have money ,,,,they can't buy their products. I hope BOTH parties AND corporate America CHOKE ON THEIR GREED.

[sjc_1]

One thing that may happen is the tide goes out but only comes half way in. 10 million people lose their jobs and only 5 million return at lower wages and few is any benefits. This has been going on for more than 30 years, but gradually so the people just think that it is them and not the system.

[steeepe]

The big failure of "free" trade is at the root of the problem. As long as we continue to permit companies to send their jobs to China, we're running out of income generation here at home. China pays next to nothing for labor and has minor environmental laws. How can we compete? Walmart ruthlessly forced a run to the bottom to save consumers a few cents. Suppliers were forced to send their jobs to China to sell to Walmart, all to save pennies on batteries. Is that savings worth millions of American jobs? We just keep shooting ourselves in the foot, and the government, which is the only entity that can act, is too limp to do anything about it. The companies certainly won't restrict their ability to maximize profits., but now their customers are going jobless and broke.

[indythoughts]

I think the whole country needs therapy. There is entirely too much unhealthy anger for totally unsubstantiated fears. If you think about almost everything conservatives are fighting against are related to what they THINK will happen. They THINK there will be death panels, they THINK the stimulus won't have any positive effects (economists now agree it has alread added up to 3 points in positive GDP growth). They THINK Obama will allow Bin Laden to become the head of the Joint Chiefs of Staff. However, they can't actually point to anything and say "See - we were right". They are just the party of NO (NO facts, no common sense, no civility,and no chance of being a national political player without significant changes.

[SkirtLifter]

Richard Conniff,

You write well. I agree with you down home, easy to understand analysis.

You wrote, ""The companies now in a panic about the vanishing American consumer are in many cases the same companies that shipped American jobs overseas. And now they worry that Americans can no longer afford their imported products? Well, gee, who would've thought?""

lol ... who woulda thunk it? Even folks who don't pay much attention to economic trends, In their thirst for pulpy doodads, can figure this one out. My son feels his attention to MySpace, text messages, modern brand name goods, and iTunes makes him "knowledgeable". He's only 16 so I don't bother him too much about it.

He wants a job now to pay for car insurance, gas, and girls. He can't find one that will pay him anything close to what he wants. He asked me what was up with that? Why are there no jobs? I explained outsourcing to him.

I showed him some old Levis, made in USA. My old tools, and some collectible electronics. I dared him to find any products like this that are made in the USA. I explained that we don't make anything to sell overseas, so we no longer have cash flow as a country. I explained how our credit is drying up as a country and all those pulpy doodads he loves so much will be a thing of the past.

Ya know, I scared the crap out of him. He actually got it. He wants to do something now. He wants to make a difference. He's a good student and maybe someday he will.

It's our youth that need to get this message and make a difference. We're not dead yet folks. The next generation simply won't have it as easy as I have.

[ClarkeGrissom]

Who said anything about GM? I bought a Toyota, made in a Toyota plant, by non-union workers. I bought a Toyota specifically because it wasnt made by UAW thugs.

[jsd330]

You bought a Toyota to support Japan. That's where the profits go.

[wyodutch]

Given the state of peril that the American economy is in... I consider the purchase of an automobile manufactured by a foreign-based company to be quite literally... an act of economic treason.

[woeisme1]

ClarkeGrissom September 14, 2009 5:49 PM EDT


Thank yourself not cash for clunkers. You made that choice. Hey I don't blame ya. That was a good deal for you, GM, the taxpayers and our economy. Buit remember, as a result of cash for clunkers, 1600 workers were rehired by GM. So it's not all that bad.

[indythoughts]

It seems like common sense advice but the political circus that has overtaken politics stops even the most sane proposals from getting any traction.