Lack of Consumer Spending is Slowing the Economy

Sometimes your age rears up and slaps you in the face…

A recent American Express poll of $450K+ earners revealed that this group is cautious about the U.S. economy. Sixty percent of those in the group believe we are in a recession that will last at least a year. Their savings rates are up from an average of 12% to 34%, with more going into cash or savings accounts and less into stocks.

Reports suggest that upscale consumers are moving from top-of-the-line cars to the next model down.

Welcome to the next phase of the consumer spending slowdown. This phase reaches all the way up the economic food chain. Considering that this group is responsible for 50% of personal consumption, expect the knock-on effects to be super-sized.

And it’s happening right on schedule…

Back in the late 1980s, we forecast a tremendous economic boom in the U.S – and around the world –with the notable exception of Japan. We saw a long bust ahead for Japan.

The U.S. boom was supposed to usher in a period of unparalleled prosperity that would last until 2008. After that, we’d lose our economic footing… and struggle to regain it for a decade.

Our main premise was that the Baby Boomers would fuel a consumption bubble as they raised their children. That bubble would burst as the children left home and the Boomers turned their attention to paying down debts and saving for retirement.

Our research showed that consumption peaks around age 48. Most Boomers would be 48 years old in 2008-2009.

As the saying goes, “We nailed that one!”

In terms of major forecasts, this one was on the money. But as with most estimates of change in complex systems, there is more to it than meets the eye.

Five Years Later…

Digging further into consumer spending patterns, we are able to parse out more finely tuned forecasts about different groups of consumers. As it turns out, those with more money, who are also responsible for more spending, peak a little bit later.

High earners tend to be those with more education. Attending college takes up time so college graduates tend to marry a little later. They start a family later and so the kids don’t leave until mom and dad are in their early- to mid-50s. The result?

Consumers with more education, earnings and wealth tend to peak in their spending in their early 50s, five years later than the Average Joe.

Given that the overall peak in Boomer spending was around 2008, we should see the next phase of this slowdown affect high earners in 2013 and 2014. As they notch down their spending, it will cause a major drag on the U.S. economy. It might not be that Williams & Sonoma shoppers are suddenly rushing into Wal-Mart, but a general reduction in spending by this group will be painful, no doubt.

Seeing big risks over the next two years, based on very predictable spending patterns, might sound like a negative… but it’s not. It’s a chance to take a critical view of where we are today.

We have a fiscal cliff of tax hikes and spending cuts looming… nothing but partisan voices screaming at each other over thorny issues like Medicare and Social Security… and now a deeper slowdown in consumption by the upper crust.

Since the equity markets in the U.S. are near four-year highs, it’s a great time to lock in gains and take a few positions that will benefit when markets roll over.

And doubt not: they will roll over.

Rodney

 

 

Ahead of the Curve with Adam O’Dell

Retail: Luxury Brands Vs. Discount Brands

While consumers of “average” means began cutting back over four years ago, most of the wealthiest consumers have continued to spend. This split in spending patterns created a bifurcated retail landscape.

Many luxury brands continued…

 

 

Categories: Economy

About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.