Companies Cut Back, but Consumers Party On, Driving the Economy

Unfortunate choice of accompanying photograph of a High Street with a „Forever 21“ store in the background - the now bankrupt retail chain which clearly suffered from a lack of consumer spending.

OK, consumers are spending as if there is no tomorrow. They will do so for Chri$tmas. When the January bills come in, the hangover will cut their spending. They some layoffs. Layoffs will bring disasters; you can pay the minimum on the credit card for a while but not on the car loan. So, sometime before the end of April (when 1st Q data are available) the deluge will hit. It's going to last a few years. Save as much as you can now and be a Scrooge. You might want to get your 401K out of stocks (and out of corporate bonds). Government bonds only. Gold? I don't think so; it has always been a sucker's bet.

There’s a recession coming. Most of my friends (in all socio-economic brackets) are living on credit cards. I turned down a needed prescription yesterday for asthma as my co-pay was $285.00. When will the financial experts wake up & realize consumer spending is not an indicator of a good economy? I’m getting ready. So should you.

I agree with other comments that much of the consumer spending and optimism is based on their higher borrowing. In June 2019 total consumer debt rose 4% to a record $4.1 trillion mainly for car and student loans and then credit cards. Long term rising debt cannot continue unless wages rise much more. Excessive concentration of income and wealth among the top 1% are the reason for this imbalance. The rich lend money to the rest of us to get into excessive debt but that only lasts so far, and then we are into a recession.

I think people are spending because they no longer believe in the future. Since Trump was elected, none of us knows what is going to happen tomorrow. Even his supporters may feel this in their bones.

Warren Buffet is sitting on $125 BILLION in cash. In other words, not investing in America. That should tell you something.

In America, the more money people owe you, the more you are worth. In spite of the fact that not everyone will pay their debt, you can borrow money against what you are owed. So banks and other lenders want more people to borrow money. One cause of corporate reduction in purchasing is the large amount of debt that many are carrying. Low interest rates led to frenzy of borrowing, but not an increase in investment. Enriching shareholders was the primary result. Also, a great deal of the profits that companies reported over the last few years were the result of cost cutting measures, which diminished the ability of businesses to respond to change. Laying off permanent employees and replacing them with temps leads to increased production and service problems, but the short term effect is higher profits. Increasing worker compensation is the only way to keep consumers spending, but that would cost the wealthy a few fractions of a percent of their wealth. The wealthy seem to prefer losing money in recessions to spending it on rewarding those who create the wealth. All of the money is going into the hands of a few people, leaving the rest of us with almost nothing to spend, unless we use credit. This will not end well.

Anybody else notice that the photo background shows a ‘Forever 21’ store who are in bankruptcy?

The consumer will spend, spend, spend until the credit card bill comes in. Consumer debt of all kind is through the roof. And when financial reality finally meets the weekly paycheck... the goose will be cooked.

The 1% are driving the economy and borrowing large sums based on artificially low interest rates. Those same interest rates entice "uneducated" consumers into spending money they don't have on stuff they don't need at the same time that people who try to save money are being shafted. My bank is paying less than 1% on a basic savings account, and CD rates are tanking. It is as though the folks in charge want to force you to spend money. This will not end well for the rest of us.

A fool and his money are soon parted. Save your money. A bargain you do not need is no bargain. These are some of the sayings my father repeated many times when I was younger. It took me many years to listen but finally his words have sunk in. My departed father is smiling from above realizing his words did not go on deaf ears.

Would be nice to see how much of that spending is being fueled by increasing household indebtedness? It seems that everyone at work is taking out home equity loans. They plan on always being mortgaged to the hilt I guess. I plan on saving up cash for any home improvements (can deal with an older bathroom for a few years, the horror!) and paying off that mortgage so I can retire one day. They can enjoy working into their 70s for their never ending mortgages.

"When will they ever learn? When will they ever learn?" They=consumers. I guess last time didn't hurt enough, right?

Consumer spending is more to do with the credit card culture rather than economic sense. Credit card money is not our money but someone’s. Sadly it’s not understood or rather ignored by the majority of consumers. If one were to make simple arithmetic calculations, one can live wisely rather than ending up on the wrong side all the time.

This "recovery" is a product of modern monetary theory. When you overlay the graphs of the YoY change of the S&P 500 and the Federal Reserve balance sheet since 2014ish, they eerily correlate. Total construction spending, value of manufacturers' new orders for all manufacturing industries, and average weekly overtime of manufacturing employees are all down from last year (source: Federal Reserve Economic Database). Profits at S&P 500 companies are slowing, stagnant, or even down, but traders are still on the high of cheap Fed money. And take a look at GDP, we are seeing some growth, but it is slowing, and becoming very dependent on consumers. Would you call this a recovery where 50% of consumers can't afford a $400 emergency, labor force participation is at an all time low (the context which unemployment should really be measured by), and delinquencies in subprime auto and home mortgages are at highs of the decade? Our policymakers are straight up lying to us with tales of economic strength. I am personally transitioning my portfolio from equities to counter-cyclical assets, as volatility is going to get rocky.

We are at the tippy tail end of an extraordinary economic expansion, the longest and largest since the Great Depression. Sectors that act as important leading indicators, like manufacturing, banking (debt interest rates), and business investment, are all flashing bright red recession signals. The big money, like hedge funds, have already moved trillions of dollars out of stocks and into safer bets like bonds and gold. Average consumers are always the last to get the memo. A recession is coming, and it’s going to be a doozy. Wall Street is ready. Are you?

No mention about the big elephant in the room, consumer debt. These same quotes ("..consumers are 70% of the economy...) were noted in 2006 just before the crash. And what did it? Consumer debt. I'll bet it's off the roof. YOLO is a way of life with American consumers. It's good until it isn't.

Indeed! Patricia Cohen's Article is scholarly so a good read. I would rather deal with the present economy not only from the text book perspective but also philosophical undertone which actually matters at the end. The unique feature of the US economy is more than 70% of the growth is contributed by home consumption. Whatever the market Americans buy, no matter! Credit card debt swelled! Debt to the charge of our sovereign assets! Stock market average positive, a bonanza for the rich and wealthy! Cohen appropriately drew an analogy of a blind man to describe the shape and size of an elephant! In fact Donald Trump's heavy tax cut, go-alone policy and trade war with China started to unfold slowly but surely! The businesses feel jittery to invest, increase capacity and spend on the R & D. Meanwhile consumers' confidence reportedly ebbing; economy contracted and export decreased. Low paying job is in abundance. For example United Way's research shows 38% of Ohio jobbers can't make both end meet though employed! Ohio soybean export to China plunged 74% from 2017 to 2018. According to the Fed Chairman 70% of the 473 counties in the rural belt is designated as having persistent level of poverty. Macropaedia knowledge in depth writes top 10% of earners make 1000% more than the rest 90% of the working people of the country! This model of economy can neither be attributed as comprehensive, sound nor sustainable! It demands perhaps paradigm shift. S. A. Samad, U.S.A.

Guy gets a $200/week raise and he goes out and spends $30,000 on a used SUV and $900 on an enormous TV? No wonder articles like this get written.

What happened to the Republican tax break for the wealthy that was supposed to create new jobs and spur the economy? Trickle down economics trickling up again.

Of course. Our economy is highly dependent on the frivolity and illiteracy of the American consumer. You know, if every Democrat tacitly agreed to cut their Christmas spending in half this year, Trump's reelection campaign would implode, but I doubt they have that kind of discipline.

Tariffs on Chinese imports was nothing more than a con game between Trump and the Chinese president. As we get closer to the election, you will see Trump easing tariffs and bragging to the world "Look what I did!!" I got China to cooperate with me!! Wowee! This should not surprise anyone.

Silly me! And I thought all this jacking of tariffs -- even though it would force the consumers to pay through the nose -- would encourage US manufacturers to hire more workers domestically and boost their capital spending accordingly! Wasn't that what DT led us all to believe??

This is exactly what was happening in 2006 and 2007.

Consumers are last into a recession and last out of it.

Consumer Spending, in the US, increased NOT because of salary increases, but because of borrowing. “U.S. consumer debt is now above levels hit during the 2008 financial crisis” Market Watch: June 25, 2019 9:12 p.m. ET “U.S. consumer debt hit $14 trillion in the first quarter of 2019 “ To the executive this is alarming As the housing bubble, debt financed consumer spending must end If you believe in learning from the past, their fear is WELL justified From the NY Times, 2005, where consumer spending was on an all time high “Running Out of Bubbles” “So what happens if the housing bubble bursts? It will be the same thing all over again, unless the Fed can find something to take its place. And it's hard to imagine what that might be. Paul Krugman Paul underestimated the inventiveness of the Fed, though. It invented QE to blow yet another bubble. But this seems the end , unless you go to an even more dangerous model * As in the soccer’s apprentice, the Fed can not even wind down QE, hard it might try * https://blogs.imf.org/2019/02/05/cashing-in-how-to-make-negative-interest-rates-work/

People such as the one described in the first paragraph are also usually the first to wonder where all their money goes. Disposable trendy junk, $7 coffee-sugar syrup beverages and overpriced restaurant meals, etc. The investor class thanks you for your service and your life spent working to pay for all this.

The Depression is coming soon. One of the reasons the last recession didn’t turn into a full blown depression was because of “ socialist “ intervention by the government saved the corporations with massive public subsidies and transfers of wealth from the middle class to the rich. Nothing has changed systemically in the way that Wall Street and the big corporations manage money. The capitalists’ uncontrolled greed looks only at the short term profits while China and other countries do long-term planning. The US is finished thanks to the capitalists. So the socialist rescue cant and won’t happen the same way again. Look for massive homelessness a la the Great Depression. This one will be much worse.

I have a lot of angst about personal spending right now. And I’ve reigned it in. I think the economy is about to crash. I hope I’m wrong but my brothers just lost their family business to bankruptcy and they are both driving for Uber.

After World War 2, there was a consumer-driven boom as consumers made up for five years of missing consumption. I wonder whether the same effect could now ripple through the economy in the wake of 2008-10 recession. People could not buy then so now they are buying what they could not buy earlier. I would have liked the article to deal with this kind of issue and it did not.

The end, ie economic crash will come with record consumer, public, corporate and student debt. The only question is when and how bad. Those are always tough to pinpoint.

There are obvious similarities with the financial situation in 2008. Or 1929. No small part of that, of course, is due to the Trumpist obsession with deregulation, even when the benefits of said regulations (and the disastrous consequences of relaxing them) are manifestly obvious. This time however, the business community seems to see it coming, which is a major departure from past crashes. I wonder how that will affect the overall outcome.

So debt-fueled consumerism is driving this economy currently? What could possibly go wrong?

The consumer is always the last one to know.

It's the holiday season. Extra work for a few weeks for almost anyone who wants it. Parties and presents and vacation time. People are allowed to be happy for a little.

Well that tax cut certainly “shared the wealth”. Ha ha. And we still read tRump leads polls. Well who knows when the spending stops it’ll stop for good this time.

Consumer sentiment will definitely decline next year, starting January - impeachment or not (Trump of course will have you believe that his downfall is our economic loss). Then there will be little left to drive the economy - debt is at a all-time high, interest rates have almost no room for maneuvering.

Spend and enjoy now. Trump is working hard to start a nuclear war. You can’t take it with you.

I thought defaulting on car loans has increased?

A classic Trump Titanic economy - the 'biggest, best economy ever'...... propped up by record debt, deficit-financing, artificially low interest rates, gold-plated toilets and golden lifeboats for all the oligarchs on board as millions of consumers enjoy the open bar and the vessel enters a sea of giant icebergs. Pathetic.

"He described consumers as more backward looking. The average person tends to notice the very low unemployment rate and reports of stock market rallies, he said, which create a sense of good times. " Economists should get out their offices and talk to other people more.

I have a secure, well-paying job as well as a moonlighting gig that I don't need to survive financially--it's purely joy driving the moonlighting. I can easily support myself on my salary alone, living comfortably. After years of over-spending and over-consuming, I've cut back considerably after reckoning with the destructiveness of our global, consumer-driven economy. Wall Street's sole reason for existing is the opposite of mine: to keep unsustainable practices alive as long as possible. Irrational exuberance never died--it simply keeps changing outfits to justify its own existence.

Because so much global manufacturing occurs and imports arrive in the U.S., and because so much of it is outside the tariffs (tariffs, BTW, consumers cannot be bothered to even think about), there is a disjunction between the corporate economy and the personal consumption economy. The reference to the conventional wisdom of the slowing corporate sector panics the consumer sector, and the reversal, where the burgeoning consumer sector inspires the corporate sector, is nowadays a gross oversimplification of the global economy and must be relegated to an old fashioned 20th-century myth. A recession will occur when the managers of the political economy drop the ball as they did in 2008, but this time around, it won't be because they deliberately engineered the collapse through a nasty combination of negligence and incompetence, rather, it will be because they get spooked (or spook themselves) and make irrational decisions that cause significant negative ripples that reverberate throughout the very complex global economy. The complexity means that there are unconventional connections across all kinds of economic sectors across the globe, many of which are unknown and will only be discovered when those worlds collide. These connections and collisions will cascade into a collapse when the C-level class sees them as a potential reality. (Sorry for the alliteration, I did not plan it.)

YOLO depends heavily on political and economic stability, since it relies on the fact that duration of the period described as "live once" can and hopefully is, quite long. At this point, we've seen the early signs of political deterioration after 243 of relative stability (excluding the Civil War) that may signal a longer term decline. Like the one which began to dissolve the Roman Empire after about 250 years. You may find that alarmist, but with the Trumpian/AntiTrumpian balance (which so closely mimics the IQ Bell Curve) being so evenly matched, I would suggest you no longer take our even keeled socio-economic environment for granted. As to economic stability, couple more thoughts. I'm educated in business and economics, and do not believe that a consumption economy can sustain itself, especially if you take it to the point, reductio ad absurdum, where consumption displaces production. You have to make something at some point. Services, which dominate our economy, lies somewhere between production and consumption. You generally can't eat, ride or save services. Notwithstanding that view, which you may dispute, our aforementioned Trumpian skew has created a lot of economic uncertainty which tends to impact interest rates and willingness to invest in the long run. That's considered "bad" for a long run outlook. I wouldn't recommend living YOLO right now, not until we've stabilized ourselves again.

Consumer spending is always a trailing indicator of overall economic activity. Look at headlines prior to previous recessions: people spend right up to the time they don’t. They increasingly use debt to fund the spending. And then, whammo. If consumer spending is the only thing propping this economy up, well, buckle your safety belt. It’s going to be a bumpy ride.

It's good that the people know that they have a purpose, and that purpose is to consume. I'll bet they are very happy just like the commercials on TV.

The one crucial element missing from this article is "how" the spendathon is conducted. Are consumers paying cash for the majority of their consumer purchases (the exception secured-debt) or are they buying all their stuff on credit? Most people have a time perspective of about 1 month when it comes to their personal finances. It's all about instant gratification, which is why, when I read about consumer confidence, I'm not impressed.

Currently, I am in a job that I do not enjoy and have halted all spending except for the necessities. If my situation becomes even more intolerable, my plan is to quit in the next few weeks, take the rest of the year off, and then resume the job search in the new year. I've been saving for this contingency.