The Death of the U.S. Consumer

On June 12th , I wrote a commentary titled “The Death of the U.S. Consumer Economy”. In that piece, I detailed the two, concurrent trends which guarantee a paradigm-shift in the U.S. consumer-economy.

The first of those trends is the maximization of available credit. Not only is the U.S. a consumption-based economy – an inherently unsustainable economic model – but for the last decade this unsustainable economic model has become entirely dependent on an exponential increase in debt/credit. This has resulted in me labeling the U.S. a “Ponzi-scheme economy”, since Ponzi-schemes also rely upon exponential inflows of capital in order to be sustained.

The problem for the U.S. now (and for the future) is that not only can exponential increases in debt no longer be financed by U.S. consumers, but this same limitation also applies to all three levels of U.S. government. For the state and municipal levels of government, this means a continuing stream of lay-offs for years to come – followed by many more years of austerity. For the federal government, it has already resulted in large portions of the current deficit being “monetized” (i.e. printing money to pretend to “pay its bills”).

With no possibility of future growth being sustained through increased credit/debt, any genuine economic recovery requires employment growth. This brings me to the second “nail” in the economic coffin of the United States. An economy roughly 70% dependent upon consumption must also rely upon service-sector jobs to provide the majority of its employment.

Public sector employment is certain to shrink through the combination of a record-collapse in revenues, and exploding costs for health-care and other entitlement programs. Tax increases and fee increases are also inevitable.

For the private sector, the combination of a lower marginal propensity to consume, and the massive down-sizing already underway in the U.S. retail sector has created a death-spiral of fewer consumer-dollars leading to more retail sector lay-offs, leading to even less consumer spending.

While I try to avoid the use of economic jargon, the “marginal propensity to consume” (MPC) is a critical concept for the U.S. consumer-economy. This statistic refers to the portion of each new dollar of income/wealth which is spent. For a consumer economy which is also highly leveraged with debt, the change of even a few percentage points in the MPC can literally spell the difference between an economic “boom” and economic disaster.

In the U.S. economy, three separate dynamics are all simultaneously at work to lower the U.S.'s MPC. First of all, there is the ever-increasing inequality of wealth distribution in the U.S. economy. In a typical capitalist society, the lop-sided distribution of wealth generally involves the wealthiest 20% of society holding 80% of the wealth (with the inverse ratio of the bottom 80% holding only 20% of the wealth).

In the United States, the top 20% holds 85% of the wealth, meaning the lower 80% hold a measly 15% of the wealth. This may not seem like a huge difference, however what it means is that the 80-percentile demographic in non-U.S. societies have (on average) a 33% higher standard of living. This has a large impact on U.S. consumption at both ends of the wealth spectrum.

It is an established principal of economics (and arithmetic) that the higher one's wealth-level, the lower their MPC. In other words, really wealthy people spend only a tiny portion of each new dollar of wealth – providing virtually zero social or economic “utility” in such individuals getting richer. Meanwhile, while the poorer members of society spend all that they have (an MPC of 100%), because they are steadily getting poorer, they simply have less money to spend every year.

This principal of arithmetic was already understood nearly two thousand years ago. It was at that time that Greek philosopher Plutarch wrote

an imbalance between rich and poor is the oldest and most fatal ailment of all republics.

Modern economics has simply quantified this principle by noting that the reduced consumption which is inevitable with increasing wealth inequality guarantees a less-healthy economy than if wealth distribution were more equal.

The second dynamic which is lowering the U.S. marginal propensity to consume is the reduction of credit available to U.S. consumers – the first time this has happened in the 40 years for which such records have been kept. The excessive reliance upon debt/credit has meant that many U.S. consumers have had a MPC of greater than 100%. In fact, for a period of two years (at the peak of U.S. bubble-insanity), the entire U.S. economy had a marginal propensity to consume of greater than 100%.

Click to enlarge:

This is simply the alternative means of expressing how the U.S. economy had a “negative savings rate” for roughly two years. What makes such a statistic so totally appalling is that the top 1% in the U.S. wealth pyramid (who hold 33% of all wealth, by themselves) have an extremely low MPC. Thus for the entire U.S. economy to have a net, negative savings rate implies a large segment of the population spending 10%, 15% or even 20% more than they were earning.

With this historic reduction in U.S. consumer credit, there can be few if any Americans still “consuming” more than 100% of what they earn. This dramatic cap on credit guarantees another significant drop in MPC.

The third dynamic reducing the MPC is a voluntary reduction in consumption by the people in the middle. Those Americans who still have “discretionary income” to spend are choosing to spend less. A Reuters article provides numbers which are nothing short of catastrophic for U.S. retailers. A full 25% of the U.S. population state they have decided to permanently reduce spending.

While some surveys are less than convincing, there are several excellent reasons to treat this consumer pledge very seriously. To begin with, U.S. consumer debt is so grossly excessive by any/every standard in history. Reducing this mountain of debt is simply a reflection of a return to sanity. Even if those massive debts did not exist, the non-existent “savings rate” for the U.S. economy was also an aberration, not only compared to any/every other country – but also an aberration in American behavior. Statistically, one would expect many years of reduced discretionary spending as the “pendulum” of behavior swings back.

To counter this, the U.S. propaganda-machine has invented new “buzzwords” for the media-parrots to recite incessantly: “frugality fatigue”. This laughable invention of the propagandists presents us with the idea that after U.S. consumers have just finished the wildest thirty-year spending-binge in human history, that one year of extremely modest saving has “exhausted” them.

A fourth drag on consumer spending is the falling wealth of U.S. consumers. I covered part of this in a recent commentary (see “Housing Sector Mirage”). A shocking one in seven U.S. mortgage-holders are already delinquent on their mortgage or in foreclosure – and 5 out 6 of those people will end up losing their homes if previous trends hold. Obviously people who lose their homes have lost most or all of their wealth – and it will be many years (if ever) before such households spend at previous levels.

Equally horrific, it was just reported that nearly one out of four U.S. mortgage-holders are “under-water” on their mortgage (i.e. they have less-than-zero equity). When record-numbers of Americans are losing their homes and record-numbers have zero equity or less, this suddenly-poor society will simply have much less to spend – even when consumers finally have access to more credit.

I cannot discuss the “death of the U.S. consumer” without remembering to mention the role of U.S. banks in assassinating the U.S. consumer. Surely no one has forgotten how U.S. banksters extorted over $10 trillion in hand-outs/loans/guarantees – hogging more than 90% of all government resources focused on “bailing out” the U.S. economy.

Readers will also recall how the “leaders” of all the banks who proudly stood in line for their hand-outs promised to “increase their lending” to U.S. consumers and businesses in order to “lead the U.S. economy” out of recession. These same “leaders” are now prepared to engage in the largest bonus-orgy in corporate history.

The bankers of Goldman Sachs (GS), JP Morgan (JPM), and Morgan Stanley (MS) are expected to give themselves $30 billion in bonuses – nearly equivalent to the wages of one million average Americans. A very, Merry Christmas, indeed!

And what about their “promise” to “increase lending” to “lead the U.S. economy out of recession”? To quote the FDIC,

loan balances at commercial banks fell at the fastest clip in at least 25 years in the third quarter” (since those records were first kept). This is quite the statement, given that lending by U.S. banks had already been falling for every quarter since Wall Street banksters made their “promise.

For those optimists who believe it's only a matter of “toughing it out” for a few years before the U.S. economy regains its footing, think again. It was also recently reported that more than 50% of every new dollar of federal debt is now simply interest payments on existing debt. All of this current, massive deficit-spending is not “building the U.S. economy” on some path to future prosperity, it's simply racking up much more debt.

The final death-blow to U.S. consumers will be the suicidal downsizing of U.S. retailers, as was pointed out in my original commentary. Sadly, falling real consumer-spending (i.e. inflation adjusted) means that it is suicide for many U.S. retailers not to down-size. The problem is that when the sector, as a whole, all down-sizes that everyone loses – since the only means for these companies to down-size is through reducing employees.

The precise nature of this down-sizing has already been spelled-out: a massive increase in on-line retailing, implying a massive decrease in retail outlets. As with the U.S. manufacturing sector, when just a few companies “outsourced” their production to Asia there was a net benefit. However, once the whole U.S. manufacturing base embraced that trend, it was economic suicide.

For a tiny number of Wall Street denizens, this Christmas will be a party of epic proportions. However, for the vast majority of the U.S. population, it is simply another bleak holiday season – with many more to come. The U.S. consumer is dead. Any possible “resurrection” is at least a generation away.

Disclosure: I hold no position in Goldman Sachs, JP Morgan, or Morgan Stanley

Comments

[JAMES CARLINI]

JEFF
Your observation is right-on but like so many other analysts you do not add the element of why so many individuals are in the position they are in. People did not all-of-a-sudden become "cash-poor", they lost good-paying jobs.

Many companies have brought in "cheap skilled labor" and replaced people. Others have just outsourced jobs to other countries. In either case, a good-paying job was lost.

This country has a glut of underemployed and needs to address labor-dumping.

Someone making $80K - $130K can well afford a house and an occasional new car (especially in two earner families $160K-$260K), but when they drop to $35K-$45K jobs (one or both earners lose jobs) their spending power erodes to nothing. These include degreed people and highly-skilled people that have gotten displaced.

The abuse of H1B visas does not seem to get a lot of spotlight yet it is a big factor in why many have dropped out of good-paying jobs and have wound up - at best - in jobs paying substantially less.

In the beginning, most thought it was just a temporary setback and ran up their credit trying to remain at the same level of lifestyle. Now, they see that it is not a 3-6 or even 12-month "recession".

As one friend put it - he has burned through his savings while trying to find another job while both his 401K plan lost money and the equity in his house evaporated in the last several years. He lost a project management job paying $90K in 2001 and since has not had a job paying more than $36K. Others have similar experiences.

I don't care who you are, if you take a 50%-66% cut in pay for a sustained period in time, you are going to be in bad financial shape.
There is no mystery why all this financial vortex is happening.

Ask those who have lost a good-paying job and what their options are. They cannot qualify for the mortgage they already have, let alone for one with better terms.

Don't count on the US consumer to get us out of this recession because they are not making the money they used to.

2009 Nov 26 05:17 AM

[Leftfield]

As the article points out, the consequences of downsizing and outsourcing is a vicious circle of lost purchasing power by the consumer and another round of downsizing and outsourcing. Those lucky enough to be employed are likely taking pay cuts (even if they retained their same job).
I notice cashiers and fast-food workers are very often older people who look as if they once held very good jobs. Now they work where once, only 16-year-olds and later, retirees, were found. We've outsourced the blue collar jobs, now it's white collar and soon, the company headquarters of the multinationals.
Who is supposed to pay for all that government overhead we couldn't afford during "prosperity?" Seriously, folks, this is a death spiral, and we need leaders who don't simply serve up more of the same.

2009 Nov 26 06:45 AM

[peterthepainter]

..."Who is supposed to pay for all that government overhead we couldn't afford during "prosperity?" Seriously, folks, this is a death spiral, and we need leaders who don't simply serve up more of the same....leftfield

...here in palookaville...

...From Wikipedia, the free encyclopedia...

Public sector borrowing requirement (PSBR) is the old name for the budget deficit in the United Kingdom. The budget deficit has been renamed to the public sector net cash requirement (PSNCR) to avoid confusion with net borrowing.

PSBR occurs when expenditures for the government activities in the public sector of the economy exceed the income. The resulting deficit is then financed by borrowing funds from the public, usually by the means of government gilts.

of course this has helped gull the sheeple...soon we will have to wake up...from a dream to a nightmare..

2009 Nov 26 07:06 AM

[swissfrank]

UK consumers still mostly asleep, methinks. If they do wake up they might like to guess what PSBR would have been without the PFI initiative which took so much public infrastructure spending off balance sheet for the government.

2009 Nov 26 09:17 AM

[Tom E.]

We have less private sector jobs in the US now than in 1999 and we need a huge amount of new jobs each year just to absorb the new graduates. Time Magazine has a good piece calling 2000-2009, the decade from hell.

www.time.com/time/nati...

2009 Nov 26 09:19 AM

[User 353732]

The Occupation Regime that now afflicts America operates within a matrix of collectivism, vanity and depravity.

The consequence of operating in this matrix is the herding, plundering and intimidation of the middle class to support in imperial splendor and wanton waste a tiny but malevolent upper class and an increasingly brutal, ignorant and grasping lower class.
It is the quintessential model of a coercive, anti-capitalist, morally and intellectually corrupt, society that we seen many times in history.
Each time the model expresses itself differently because no historical circumstance is ever repeated precisely. What we are witnessing is the specific US expression of that ancient model and even more ancient matrix.

By their fruits,indeed, do we know the US Regime and the fruits are bitter and poisonous for ordinary people but sweet and sustaining for the bosses.

2009 Nov 26 10:51 AM

[dragonpaw]

Jeff et al: You've got to put this into perspective of the New Regime plan . The US consumer is simply a lost pawn in the larger chess match of the new world order. As out national debt grows rapidly and wildly unwieldy out of control, we are again forced
to the brink of economic collapse. The next "bail-out" will see a new world dollar that reflects the real value of the US dollar relative to other world currencies. Commodities will no longer be valued in $US.
China, Japan, Euro-banks, and all other indebeted-to-US entities will take the initial hit of 60-70% loss of US dollars held, as long as their fiat money jumps 30-40% in relative value. A new world "dollar" (the Yuan-mark?) will "control and stabilize" the financial landscape. Of course all the mechanations to get to this point will take place with great rapidity behind closed doors.(One of the most notable ear-marks of the New Regime.) George Soros and his Machiavellian cabal will be orgasmic with their newly-thieved hundreds of billions (perhaps trillions?)
The New Regime will have achieved it's ultimate socio-redistributionist goal. With only 5% of the world's popluace, the US will have 5% of it's total wealth. Of course George and his multi-billionaire buddies will have expatriated themselves and their largesse long before the shit has hit the fan.
"We have seen the enemy, and he is us."

2009 Nov 26 11:28 AM

[Grumley]

Jesus Personal, be careful with your claim that the Dow will never break 11,000. The market now is in lockstep with the depreciation of the dollar. In fact most of the Dow's rise over the last 8 month is correlated to the dollar's fall. As the dollar falls it requires more "dollars" to buy the same stock shares, so on a nominal basis it appears to be going up. As the dollar continues to fall this relationship will cause the market to rise and give the public the impression that things are improving.

If you priced the Dow in gold you would find that is has barely gone up at all from its March lows. Sadly most people equate the stock market with the economy. It will take some time for them to realize a rising market and falling dollar is no reason to celebrate.

2009 Nov 26 12:05 PM

[Moon Kil Woong]

The US consumer is rapidly being replaced by the US government. Should we all jump for joy or go cry in a corner? Some economists think that replacing lost workers with more buraucracy paid for by deficits is good for you. What do you think?

For one thing government doesn't buy from mom and pop stores, so you can forget the small and medium sized businesses getting any of the windfall. And as for everyone else, they are too busy stuffing their own pockets to help you out. You will be lucky if they buy a crossant sandwitch from you on their way from one meeting to the next.

While the government gets fatter your purchasing power gets smaller. I doubt if any of you got a 14% raise to make up for the 14% drop in the value of the dollar. Inevitably you are the one that will pay, and pay, and pay, and pay...

2009 Nov 26 12:39 PM

[romorris]

There was no depression and the recession is over. The US economy is on the mend and shoppers are out in force. The massive rise of the stock market reflect reality. Not hardly a day goes by where new data confirms the uptrend.

Those that really took a hit and didn't recover will insist on being negative and congregrate with like-minded people. The negativity will keep them down and out a lot longer than if they just put on a smile and were willing to see the sun shining through the clouds.

Sh*t happens, the recent episode is over, get used to it.

All is well and its the holidays. For those that didn't head over the cliff with the other lemmings, its truly a time to rejoice as they have never been wealthier.

The recent down turn was the biggest opportunity in your lifetime. I'm sorry if you missed it, but those who were paying attention generally didn't.

2009 Nov 26 01:34 PM

[Donald Ingram]

Jeff - Another great article, well researched, thought out and presented.
The only thing I would add is a word about demographics - the 'baby boomers' are not coming back to consume. Its too late for them. They are busy trying to rescue something/anything for their too close retirement. Many will end up flipping burgers or being Wal-Mart greeters in their old age just to make ends meet.
Remember, the 'baby boomers' still out number all the other segments of society. This generational bubble will substantially add to the societal cost as it ages vis a vis social security, medicare and senior housing. All those children of the boomers who had hoped for a sizable inheritance are now out of luck.

2009 Nov 26 02:01 PM

[Cormack]

Reduction of storecount concurrently with lower headcount allows for monthly American same-store sales of US retailers to show a reported increase resultant from reduced SG&A, salary, general and administrative expenses and higher gross margins by several hundred basis points compared against the abyss of last year. Consequently, the net operating margins also expand for those retailers as do their share prices. It is remarkable though that two years ago marks the point at which the average American thirtysomething male was for the first time living at a lower standard with a lower quality of life compared against the previous generation.

2009 Nov 26 08:02 PM

[Economic Lens]

Taxes are slowly rising and will continue to get much worse. Health insurance premiums are rising, some as much as 20% in a single year. Prices of food are rising though everyone acts like it is not happening. Consumer credit is being tightened. Each of these things reduce the consumer spending power. Then we will get word that spending is up for the holidays. Don't believe it. If we have less stores now, a slight increase in per sales stores will still be way less overall sales. The people reporting will take the most optimistic number which will be per store sales. Overall spending will be down this year no matter what is reported. The retail sector is in a death spiral.

2009 Nov 27 08:56 AM

[Johnny Oxygen]

Hey Romorris.

I clicked on 'follow' for you.

I want to read some of your posts after things fall apart in the near future here. It will be very entertaining to see your responses.


On Nov 26 01:34 PM romorris wrote:

> There was no depression and the recession is over. The US economy
> is on the mend and shoppers are out in force. The massive rise of
> the stock market reflect reality. Not hardly a day goes by where
> new data confirms the uptrend.
>
> Those that really took a hit and didn't recover will insist on being
> negative and congregrate with like-minded people. The negativity
> will keep them down and out a lot longer than if they just put on
> a smile and were willing to see the sun shining through the clouds.
>
>
> Sh*t happens, the recent episode is over, get used to it.
>
> All is well and its the holidays. For those that didn't head over
> the cliff with the other lemmings, its truly a time to rejoice as
> they have never been wealthier.
>
> The recent down turn was the biggest opportunity in your lifetime.
> I'm sorry if you missed it, but those who were paying attention generally
> didn't.

2009 Nov 27 11:46 AM

[romorris]

Good idea. Watch and learn.

2009 Nov 27 02:05 PM

[Tony Daltorio]

Bubble-boy alert!

Over my 30 years in the investment industry, these guys are a dime a dozen...they think they "know-it-all", but they always end up losing it all...I remember lots of these guys in my office when I was at Schwab during the 1987 crash, blubbering like little babies.


On Nov 26 01:34 PM romorris wrote:

> There was no depression and the recession is over. The US economy
> is on the mend and shoppers are out in force. The massive rise of
> the stock market reflect reality. Not hardly a day goes by where
> new data confirms the uptrend.
>
> Those that really took a hit and didn't recover will insist on being
> negative and congregrate with like-minded people. The negativity
> will keep them down and out a lot longer than if they just put on
> a smile and were willing to see the sun shining through the clouds.
>
>
> Sh*t happens, the recent episode is over, get used to it.
>
> All is well and its the holidays. For those that didn't head over
> the cliff with the other lemmings, its truly a time to rejoice as
> they have never been wealthier.
>
> The recent down turn was the biggest opportunity in your lifetime.
> I'm sorry if you missed it, but those who were paying attention generally
> didn't.

2009 Nov 28 12:05 PM

[romorris]

All this negativity !! The time to buy is when equities are unpopular, not when the masses give you the ok to run with the pack.

When I get a herd of people shouting to take shelter in the safety of their numbers, it gets extremely tempting to head the opposing direction. Don't let the herd do your thinking for you. When things really stink the opportunities for improvement are tremendous. When you see the sun shining, it is *way* too late.

Consider the massive influx of cheap investment American companies are receiving right now. They can pay their workers much less for the time being and these frightened workers are looking for anyway to contribute they can - any way to stand out. They need an edge. I'm seeing people work themselves day and night to keep their jobs trying to out maneuver the competition. Per hour worked, these companies are getting twice the return they once did and labor costs are everything to most companies. Productivity is through the roof. Good things are getting done that these companies never dreamed of just a few short years ago. New, more productive way of doing business are popping up all over the place. We're not just working harder, we are working smarter as well. We've never been so focused at any time since right after perl harbor. These aspects alone are providing a hurricane force tail wind to just about each and every company and much of that money will be reinvested right here at home.

Tremendous positive feedback loop getting going here. That force is America you see buckling down and getting the job done - working outselves out of the issues caused by past excesses.

If you're saying America is down and won't be getting back up, you are tragically mistaken. We'll work ourselves out of this funk soon enough and the market is going to reflect that.

The pendulum has swung way to far on the pessimistic side. Recognize it and profit. Maybe not tomorrow, but right quick.







On Nov 28 12:05 PM Tony Daltorio wrote:

> Bubble-boy alert!
>
> Over my 30 years in the investment industry, these guys are a dime
> a dozen...they think they "know-it-all", but they always end up losing
> it all...I remember lots of these guys in my office when I was at
> Schwab during the 1987 crash, blubbering like little babies.

2009 Nov 28 01:43 PM

[Johnny Oxygen]

Oh my God! Someone drank the kool-aid.
Yeah guys stop being negative. If you just stay positive everything will be OK...even with a $700 trillion dollar debt...and no production...and a falling dollar...and 500,000 jobs lost each month...and...


On Nov 28 01:43 PM romorris wrote:

> All this negativity !! The time to buy is when equities are unpopular,
> not when the masses give you the ok to run with the pack.
>
> When I get a herd of people shouting to take shelter in the safety
> of their numbers, it gets extremely tempting to head the opposing
> direction. Don't let the herd do your thinking for you. When things
> really stink the opportunities for improvement are tremendous. When
> you see the sun shining, it is *way* too late.
>
> Consider the massive influx of cheap investment American companies
> are receiving right now. They can pay their workers much less for
> the time being and these frightened workers are looking for anyway
> to contribute they can - any way to stand out. They need an edge.
> I'm seeing people work themselves day and night to keep their jobs
> trying to out maneuver the competition. Per hour worked, these companies
> are getting twice the return they once did and labor costs are everything
> to most companies. Productivity is through the roof. Good things
> are getting done that these companies never dreamed of just a few
> short years ago. New, more productive way of doing business are popping
> up all over the place. We're not just working harder, we are working
> smarter as well. We've never been so focused at any time since right
> after perl harbor. These aspects alone are providing a hurricane
> force tail wind to just about each and every company and much of
> that money will be reinvested right here at home.
>
> Tremendous positive feedback loop getting going here. That force
> is America you see buckling down and getting the job done - working
> outselves out of the issues caused by past excesses.
>
> If you're saying America is down and won't be getting back up, you
> are tragically mistaken. We'll work ourselves out of this funk soon
> enough and the market is going to reflect that.
>
> The pendulum has swung way to far on the pessimistic side. Recognize
> it and profit. Maybe not tomorrow, but right quick.
>
>
>
>
>

2009 Nov 28 07:30 PM

[Up Yours SP500]

The American way is the blame it on someone else, go figure. We lost our jobs, blame the government. We lost our savings, blame Wall Street. We lost our house, blame the mortgage brokers who gave me a shady loan. We can't compete with India and China who are taking away our jobs (The interesting fact about that is the wealthy there still send there kids to colleges HERE in the U.S., go figure). We were too lazy, stupid, ignorant, and uneducated to read a book, so we listen to idiots like Sarah Palin to get us through these tough times.

God bless Fox news! The more popular they are, the easier is becomes to make money of the stupid few.


On Nov 26 10:57 AM oligarch_lies wrote:

> The truth is so dark that I'm scared for my children....
>
> I know that goldmanites have their eyes on.....INDIA, the largest
> democracy, where they can go and SUCK everything....(no simple coincidence
> with the Citi's boss and a lot of stakes in ....India).
>
> everything will be there....our jobs, our future....

2009 Nov 29 01:42 PM

[romorris]

Hey Johnny,

What you think of the employment numbers today ?

Don't let any personal situation make you ignore the obvious. There's a recovery going on and it's going to be *marvelous*.

Time to chalk the stick and make $ with a well-place recovery play.


On Nov 28 07:30 PM Johnny Oxygen wrote:

> Oh my God! Someone drank the kool-aid.
> Yeah guys stop being negative. If you just stay positive everything
> will be OK...even with a $700 trillion dollar debt...and no production...and
> a falling dollar...and 500,000 jobs lost each month...and...

2009 Dec 05 02:04 AM