This quarter is likely to be the first since 1991 in which American consumers cut back on their purchases. A Wall Street Journalsurvey of more than 50 economists found that they "expect a 0.1% contraction in consumer spending during the third quarter." Other forecasts expect a greater than 1 percent decline.
The last recession earlier this decade surprised economists when consumers continued to spend, even as the stock market declined, unemployment worsened, and wages were stagnant. Of course Americans were encouraged by politicians following the terrorist attacks of 9/11 to do their patriotic duty and hop on planes, visit shopping malls, and go to the movies. Though finanicial markets and wage growth slackened, consumers were able to tap into their homes to maintain the type of consumption the go-go '90s had provided.
It's over now–even for teens. Often viewed as recession-proof spenders, American teenagers are getting frugal. Adrienne Tennant, a senior analyst at Friedman, Billings, Ramsey, told Portfolio magazine, "Usually teens are a resilient portion of the economy because all spending is discretionary, but this time around, gas prices are clearly eating up budgets." Despite a $100 billion stimulus injection, retail sales fell in August after falling in July.
On top of that, declining gas prices seem to have done nothing to make consumers more willing to spend. "The fact that purchases at gasoline stations declined 2.5% for the month and consumers did not utilize those savings for consumption elsewhere is more than a bit troubling," says Joseph Brusuelas of Merk Investments."
Over the long term a consumer retrenchment is probably a good thing, but the process may last years, which would be economically painful. It would mean high unemployment, slow economic growth, stagnant house values, and more.
While this is no immediate consolation–especially to those looking for jobs, seeing their homes foreclosed, struggling to make payments–it illustrates, in a fascinating way, human behavior. First, you get what you pay for. Pay too much (because you were too greedy) for a high-priced stock or home, and it will come back to bite you. Next, go too much into debt, as as the Bible warns, you'll become servant to the lender. Third, follow the crowd that exuberantly says, "This time it's different," and you'll find that broad are the paths that lead to destruction.
Finally, there is nothing new under the sun. Centuries ago, John Bunyan instructed readers of The Pilgrim's Progress on the dangers of Vanity Fair. Christians, he admonished were to follow the example of "that Blessed One," who was tempted by the devil when he passed through the town "to cheapen and buy" some of the delights at the fair. "But he had no mind to the merchandize, and therefore left the Town, without laying out so much as one farthing upon these Vanities."
Though the Puritan's words seem oh so applicable now, he knew the temptations would return. "This Fair, therefore, is an ancient thing, of long standing, and a very great Fair."
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