I don’t know about you but whenever someone uses the word "resilient" to explain what's behind a rebound in consumer spending -- I always cringe. What exactly does that mean? Typically, the term is heard in the following context. An analyst or economist, when pressed to justify an unexpected jump in household shopping, will often respond by saying "it looks like consumers are showing amazing resilience."
"Showing amazing resilience?" Where’s the insight in that observation? How does that explanation enlighten anyone?
By definition, someone demonstrating resilience means they are resourceful, imaginative, or creative in their actions. OK, we get that. But it seems to me it is such a vacuous term when used to explain consumer behavior.
The reason I bring this whole issue up now is because consumers are apparently not showing much "resilience" these days. Whether you look at retail sales or the more comprehensive personal spending report, they tell same story. Americans are increasingly reluctant to go shopping.
Why? Well, for one, this retrenchment by consumers has nothing to do with a sudden lack of "resilience." Even during the halcyon days when everyone was happily buying houses, appliances and home electronics, it never had anything to do with consumers being resilient. Just the opposite, all that bold spending was really the result of a most "unresilient" action by consumers -- diving into debt! It was households piling up IOUs by taking out personal loans, using credit cards and tapping their home equity that led to so much personal spending. So all along it was debt, not resilience, that was behind all this hyperactivity by consumers.
But now, as banks and other financial firms effectively shut their lending windows after years of recklessly doling out credit, consumers (and more than a few economists) are seeing the painful consequence. Total household debt as a percentage of assets is now at 19.2%, the highest EVER, says the Federal Reserve. The amount of equity Americans have in their homes just dropped to 47.9% of the value of their property, the lowest EVER! Household net worth (AKA household wealth) fell at a 3.6% rate in the latest quarter, the first it time it declined in five years. Yes, Americans are poorer now. But then no one said that "resilience" comes cheap.
Bernard Baumohl is an economist and managing director of The Economic Outlook Group. He is also author of "The Secrets of Economic Indicators: Hidden Clues to Future Economic Trends and Investment Opportunities" (Wharton School Publishing).
Comments
Resilience when used in defining consumer behavior. "The ability of an individual person to consistantly earn 100% income and spend 110% of it and save absolutely nothing for retirement". See also definition for "Good American" and "Keeping up with the Jones".
Pardon my dour definition, but most people are so enamoured with having a high standard of living, they don't see that living beyond ones means and buying things with credit cards has to be paid back. And that retirement isn't very comfortable if you have to sell all of those things you bought with the credit cards to pay for your current expenses like gas in you cars tank, this months electric bill or food to eat.
There needs to be a major shift in the American Mentality. Maybe it's time that we not only teach kids how to balance their check book in high school, but how to budget and save for the future as well. If we start young enough and enforce the be frugal, live within your means and save idea's when kids are young, they may just be that way when they are adults.
It's refreshing to see a realistic analysis of the financial condition of households. Calls for a bottom in this credit crunch are premature. The Fed and U.S. Government have theoretically unlimited resources to bail out bankrupt banks, but in the long run such measures seem highly inflationary.