An Economy Based on Consumer Spending

People refinanced their homes over and over again to pay off consumer debt that they used to purchase granite counter tops, boats, vacations, cars, SUV’s, and on and on. Consumers used their homes like personal ATM’s taking $2.3 TRILLION in cash out Refi’s between 2003 and 2008. The economy cannot recover without strong consumer spending. News Flash. The consumer is tapped out.

As a matter of fact I just read an article about the extreme weakness in the retail sector. Consumers are keeping their purses shut. Many big box stores are in trouble, Macys is leading the pack. There has been a paradigm shift in the way the consumers are spending. To make matters worse the weakness (collapse) of retail spending is leading to another crisis-The commercial real estate market. The largest Mall owner in the country just went bankrupt. The past two years have been very hard on the American consumer and brought them to face some harsh realities. In that short time span they have lost an average of 30% of their homes value, their investments and 401K’s have lost between 30% and 50%, their credit lines have been frozen, reduced or completely eliminated and they watched as the Credit Card companies have reduced credit limits and raised interest rates to unlawful levels.

Consumers have been forced to change their spending habits, trying desperately to live on less as they struggle with their overwhelming credit card debt. And if they are late with just one payment or God forbid-miss a payment, the predatory Banksters are pounding them with exorbitant interest rates, further reducing the discretionary spending of these consumers. Were will all the discretionary spending come from now that home equity has suddenly gone negative?

That means everything must fall within the family budget. The rebuilding of personal balance sheets will be an ongoing struggle as households try to lower their debt-load through additional cuts to spending. But if wages continue to stagnate, unemployment keeps rising and credit continues to dry up, the economy will slip into a semi-permanent state of recession.

Durable goods orders fell by 2.4% in the month of August. It was the largest decline since January, the index while rising by 4.8% in July went back to its losing ways by falling 2.4% in August. The Commerce Dept also reported sales of new single family homes advanced by .7% for the month of August to 429,000 units, it was the highest since September of last year. The trend continues to be positive but I would not call the activity brisk because we do not have a lot of consumer spending going on.

Washington politicians solidly in favor of supply side economics are unwilling and unprepared to make the necessary changes to put the economy back on solid footing. These short sighted politicians see the reduction in consumption as a temporary anomaly that can be revived with artificially low interest rates and stimulus. These clowns think the economy has just hit a temporary slowdown between periods of expansion.

There have been a number of surveys recently suggesting the Politicians are sadly mistaken. As always their rallying cry is that this time is different. The fact is it is business as usual. The bottom line is that you cannot spend your way to prosperity. Consumer Spending will not be able to lead the way out of Recession.

Written by Wayne Isaksen
www.teampayitoff.com