This is exactly what I, for one, expected--every time I went to a mall, the parking lot was full, but there were no lines at checkout. This isn't only bad news for retailers, but also for credit card issuers, since one guess where the money that wasn't spent at Christmas is probably going.
But it seems to me that this is actually good news for consumers and, in the long run, the economy. Americans are massively over their heads in debt, and have been consuming beyond their means for a long time. The data shows them cutting back their spending to more reasonable levels, and cutting back the most in the most discretionary categories. I feel bad for Hermes and all, but we couldn't keep propping them up forever.
I find the graph confusing, and the article doesn't really help. Do the categories refer to the items themselves, or the retailers? You'd think retailers, because "online sales" isn't a type of item, but then where do department stores, Walmart, Target, etc. fall?
Wasn't this kind of decline inevitable? Men's fashion tends to be pretty static, and how many Rolex's does a person need, regardless of the state of the economy?
“Americans are massively over their heads in debt, and have been consuming beyond their means for a long time.”
I agree! We can certainly create government incentives for Americans to save more, spend less, and work fewer hours per week – without asking the U.S. government to micromanage a $1 trillion economic stimulus package.
For example: a tax on consumption; a tax credit for increases in net worth.
Another example: If year-over-year auto sales are down 30%, encourage the U.S. big three to furlough workers (unpaid leave) for 1 month out of every 3. Workers could use this time, if they wished, to pursue technical training for a new career. Managers and engineers could use this time, if they wished, to explore manufacturing opportunities in new markets – mass transit, wind turbines, etc.
During the Great Depression, underemployed workers used their considerable carpentry skills (many grew up on farms) to maintain, repair and expand their houses. During this decade, an underemployed friend of my father purchased -- one-by-one and for very little cash -- a dozen houses that were little more than shacks. He fixed up each house and rented it out. The income from this investment sustained him for the rest of his life, and he provided comfortable homes for a dozen families.
Another example: As an alternative to asking the U.S. government to micromanage a $1 trillion economic stimulus package: Every business to give customers a “rebate” (i.e. a negative sales tax), the rebate percentage to be specified based on the projected annual unemployment rate.
For example: 10% rebate for 7% unemployment, 20% rebate for 9% unemployment; 20% federal sales tax for 4% unemployment; etc.
This proposal is self-financing over an economic cycle: the federal sales tax during periods of low unemployment creates a surplus, to be distributed via rebates during periods of high unemployment. The implementation is simple: point-of-sales software already computes state/local sales taxes, and automatically pays this tax to state and local governments.
This rebate system could be fine-tuned, if desired, by scaling the rebate based on “domestic content”, specified for each product class. For example: home-repair contractors are designated as 100% domestic content; U.S.-manufactured cars are designated 50%; imported flat-panel TV’s are designated 10%.
Larry G.,
This idea is beyond silly. What do you think will happen when a revenue (or cost) stream is dependent upon government-produced numbers?
Question,
All indications are that one of the main drivers of the current bubble was the flood of excess Chinese savings. If the US became a nation of savers wouldn't that just create another bubble as all that money chased ever more tiny returns?
Question for Larry G
"I agree! We can certainly create government incentives for Americans to save more, spend less, and work fewer hours per week"
Why would we WANT people to work fewer hour per week?
I would add "work more years before 'retirement.'"
Thomas,
I think he might have been referring to this article in Slate http://www.slate.com/id/2207406/
It's about the merits of consuming leisure.
jmo,
Noted. It's still a bad idea. If you make government revenue (or cost) streams explicitly dependent on the unemployment number (which one - U-1,2,3,4,5,6?), all that will happen is U-3 (the official number) will never go above the threshold that turns revenues into payments. Of course, people will still be out of work, but government numbers won't show it.
I doubt Hermes will suffer all that much. "Luxury goods" is a broad category, with weird preferences and substitution effects within it. I would expect Gucci to suffer because its products fall squarely within that area where people cut back on spending, and many people who purchase Gucci or LVMH products on a regular basis might be hard hit by the recession (particularly in NYC). However, super-luxury goods, perhaps counterintuitively, are less affected by recessions -- the super-wealthy tend to remain super-wealthy, and super-luxury is still a status-marker.
I agree with MDF. I suspect that all the people who have been treating themselves to Godiva chocolates and Coach purses in the local malls will be stopping, while the really, truly wealthy won't stop spending on whatever they buy anytime soon.
While holiday selling season was certainly poor, I'd be careful about extrapolating to closely from the SpendingPulse data. Many retailers over the last few months have discussed the shift they've seen in consumers using cash instead of credit cards. My guess is that overall retail spending will look better than the credit card data shows, but it will still be miserable.
jmo,
The bubble had nothing to do with "excess Chinese savings." We can't blame our spending habits on the people who want to sell us things.
MDF & KLUG,
I think it depends on the source of the wealth. The wife of the bariatric surgeon is still going to be dropping 10k a month at saks - that won't change.
However, someone with $100 million in 2006 invested in cash, treasuries, munis, stocks and real estate is going to be down at least 15-20 million. If your Amex bills are $2-300,000 a month - you might start to cut back a little.
Cody,
Really?
"In the past decade, China has invested upward of $1 trillion, mostly earnings from manufacturing exports, into American government bonds and government-backed mortgage debt. That has lowered interest rates and helped fuel a historic consumption binge and housing bubble in the United States."
@jmo: That's sort of my point. Specifically, I'm talking about all the folks whose household incomes are
As for your bariatic surgeon family, I'm guessing they'll still feel the pinch as people who were using HELOCs to fund their elective gastric bypasses aren't anymore.
The super-wealthy, like the poor, will always be with us. I suppose I don't have an eye into their spending habits, but if you do, I'd love to hear it.
Klug,
I do have some experience and even the "the really, truly wealthy" vary their spending based on their investment returns.
Example:
It's 1999 and someone with $100 million finds that due to the rising stockmarket he's now worth $120million. It means art, wine, jewlery for the wife, netjets rather than first class commercial, generous chartiable contributions, etc.
Now it's 2001 protfolio is now at 89 million. Back to first class commerical - even biz class! yelling at the wife when the amex bill comes, etc. Seeing those numbers drop with each statement can really put a damper of the fun, no matter how much money you have.
Let's not forget that large swaths of middle class individuals were buying expensive luxury goods. The majority of the people I've seen with flashy designer purses were at best upper middle class. You don't need to be rich to buy diamond jewelry and designer clothes if it's easy to get $20K in credit cards. It's also much easier to do this and purchase a $60K SUV if it's done with a cash-out refinance, or a HELOC. Same with expensive resort vacations etc.
It's not the truly wealthy that are pulling back, it's the faux wealthy who only can afford their lifestyle because of credit cards and HELOCs that are pulling back.
@jmo:
First of all, my comment was cut off, due to the 'less than' sign. I was going to say (similar to JordanT) I'm talking about all the folks whose household incomes are less than 100k or so who were buying expensive purses, etc.
Since you know something about the spending habits of the super-wealthy, what's their burn rate like? Do they put 15% of their income for retirement, etc. like we're all supposed to do or is it easy-come, easy-go?
Klug,
If you had $100 million you'd try and aim for a withdrawl rate of 2-3% or $2-3 million a year. A conservative portfolio should allow for a 2-3% withdrawl rate with enough being reinvested to compensate for inflation. So, if you were 55 with $100 million you wouldn't be saving for retirement per se, you'd just try and insure than enough remained to conteract inflation.
It's easy when the portfolio is up $20 million to say - How much do you want to withdraw this year? It's hard when the portfolio is down $12 million to say - How much do you need to meet your expenses?
As for what people with high incomes but little capital - I'm not that familar with their savings patterns.
Food for thought: not everyone in the supposed middle class has lived like it. We are at that level income wise, but have no more buying power than when we were both in college, and we never bought designer crap.
We did take student loans for our masters degrees and that debt, combined with a used car loan, and a few credit cards, mostly from needed expenses (see used auto above) together nearly total our rent. We do have a child who incurred high medical costs out of pocket that contributed to the credit card debt, but also, inflation has eatten us alive, from gas to groceries, to rent (or mortgages when we had one). We lost a lot on our first homes partly because we put too much into them that we didn't see a return on because at the time we thought we'd be in them long term. I used to spend one hundred a week on food, less than ten years ago, but now that number is nearly a thousand a month (although I have a child on a special diet and his alergie free foods are expensive). Beef, milk, veggies, have nearly all doubled for me, as has rent and electric. Income went up during that time, but so did taxes and college debt, leaving us no better off for having done nearly all the right things.
We've been frugal in gift giving in past years, but this year just annouced we weren't buying anyone anything and we didn't expect any different in return. It made for a more pleasant holiday.
By the way, my purse is eight years old, and while all leather, it is not designer.
May I ask what your masters degree was in?
Not to be nosy, k1023, but just in case you haven't tried, even in this environment you can get 0% balance transfers and shove down your interest payments if you haven't missed any payments. A surprising number of middle class people in your situation don't try negotiating with their credit card companies, who will happily keep ratcheting up your fees if you don't push back.