The end of 17 years of borrowing-fueled spending.
This quarter is likely to be the first since 1991 in which American consumers cut back on their purchases. A Wall Street Journal survey 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."
Posted by Rob Moll on September 12, 2008 8:21PM
Comments
So a one quarter reduction in consumer spending equals the death of over-consumption in America? And everyone who has ever paid too much for a house or stock did so only because of greed? If you're going to use the Bible for financial wisdom, you should be honest and admit that Jesus tells his followers to not store up any wealth on earth. Have you got any wealth stored up, Mr. Moll?
Posted by: ex-preacher at September 13, 2008
Fortune had an article on the very same thing, there take was much darker and worrisome
The next credit crunch
Posted by: Rob in Madrid at September 14, 2008
Today Obama blamed the Bush Administration for the housing crisis and ultimately the demise of some financial institutions. That tells us just how little Obama knows about economics. The fact is that the mortgage crisis is something that is occurring world wide because of an unsustainable bubble in the housing market fueled by low interest rates in the past decade. Bubbles in markets occur throughout history and this is not unlike the bubble in the late part of the Clinton Administration when many people lost a fortune in the crash of the stock market because of the over valuation of dot.com stocks.
A bubble occurs when people expect prices to rise even further and there is a kind of feeding frenzy going on. People just thought real estate values were going to continue to rise as in the past and they never thought the opposite could occur. I remember telling people in real estate in about 2003 that we were pricing ourselves into oblivion.
This continual rise in prices simply could not sustain itself. But many just scoffed at me and told me I was just being negative. Many were sounding the alarm in the financial markets, but it was going so good that people just didn’t listen. But the history of economics teaches us that all hyper-inflationary trends end in a crash. Remember the stock market crash before the Great Depression? It was the same thing. Sooner or later the market goes out of balance and the opposite affect occurs.
A good example of this is oil. There was a feeding frenzy of speculation with oil. It was fueled by an unrealistic expectation that oil would simply go higher and higher and higher. It hit $147 a barrel. It has now dropped to under $100 as of today. It was a commodity bubble. Those people that bought on the futures at $147 have lost a lot of money. People in the industry were sounding a warning signal that this could not be sustained. Few listened. Sure enough demand began to drop and that caused the oil markets to decline more rapidly than they went up. This is an example of what occurred in the housing market. The difference is that in real estate it takes longer for balance to occur because of the imperfect nature of the market.
This should be a good economic lesson to all. A period of hyper-inflation in any sector of the economy will end with a crash of that sector at some point in time. Some people will ride the bubble for awhile and make money, but many will end up on the scrap heap of economic ruin. And just remember that greed which often fuels these bubbles is one of the seven deadly sins. It wasn’t Bush, it was greed; pure and simple greed.
Posted by: Doug at September 15, 2008
It is greed, plain and simple; people want to forget one fact: there is no easy money. God does know the dehabilitating influence of debt. God began the model by giving the year of jubilee. Debts were cancelled, and burdens were lifted We could consider that now.
Posted by: Chris Archer at September 15, 2008
CT is to be commended for addressing this kind of issue. It is too large and far reaching to ignore. However, CT would also provide us with a great service if it would help its readers to see just how much popular evangelicalism is the "religious" expression of this uber consumption. It is no coincidence that the rise of the mega church, which by its own admission is built on a consumerist model of marketing and management, runs right along with that of the economy. Perhaps CT might ask a theologian to discuss the "economy" of the Triune God, in whose grace we are created and redeemed, a story of God's abundant goodness toward the world that is "consumed" in Word and Sacrament, and given away in coslty love and service to others, since the divine source and goal is God himself, whose generous love knows no bounds. Perhaps if evangelicals were to remember this economy (outlined in the Creed and narrated in Scripture) they might see themselves as God's beloved, called to be holy, rather than spiritual consumers who need to won over by "brand loyalty."(will all due apologies to Willow Creek and "Reveal.")
Posted by: MP at September 16, 2008
We have for quite some time been worshipping at the altar of Mammon. Jesus quite correctly told us that we can serve only one Master. Mammon is a very demanding "god", always seeking more from the slave but never satisfying.
Posted by: Andrew at September 21, 2008
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