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Retail Sales Plummet: The Consumer Crunch Arrives

Posted by: Michael Mandel on January 14

I haven’t been tooting my own horn very much, because like almost everyone else I missed the magnitude of the downturn.

However, I did expect the collapse in retail sales that was reported today (down 5.6% over the past year, even leaving out gasoline stations). Back in November 2007, I wrote a cover story entitled “The Coming Consumer Crunch. ” Back then I wrote:

It’s been a glorious run for the consumer. In the past 25 years, Americans have kept shopping through good times and bad. In every quarter except one since 1981, consumer spending rose over the previous year, adjusted for inflation. The exception was the first quarter of 1991, and even then the decrease was a mild 0.4% dip.

The main fuel for the spending was easy access to credit. Banks and other financial institutions were willing to lend households ever increasing amounts of money. Any particular individual might default, but in the aggregate, loans to consumers were viewed as low-risk and profitable.

The subprime crisis, however, marks the beginning of the end for the long consumer borrow-and-buy boom. The financial sector, wrestling with hundreds of billions in losses, can no longer treat consumers as a safe bet. Already, standards for real estate lending have been raised, including those for jumbo mortgages for high-end houses. Credit cards are still widely available, but it may only be a matter of time before issuers get tougher.

What comes next could be scary—the largest pullback in consumer spending in decades, perhaps as much as $200 billion to $300 billion, or 2%-3% of personal income. Reduced access to credit will combine with falling real estate values to hit poor and rich alike. “We’re in uncharted territory,” says David Rosenberg, chief North American economist at Merrill Lynch (MER ), who’s forecasting a mild drop in consumer spending in the first half of 2008. “It’s pretty rare we go through such a pronounced tightening in credit standards.”

Don’t expect the spending to come to a screeching halt, however. Remember the stock market peak in early 2000? It wasn’t until a year later that tech spending fell off the cliff and the sector didn’t hit bottom until 2003. The same delayed impact holds true here. The latest retail sales numbers, which showed a soft 0.2% gain in October, suggest that spending may hold up through this holiday season.

Next year, though, will be much tougher. The consumer slump may be deep and long-lasting, and the political implications could be enormous.

Consumer spending is *not* going to come back anytime soon.

We now return you to our regularly scheduled programming.

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Reader Comments


January 14, 2009 03:06 PM

I'm too often surprised to see an economist get things right. Stanley Bing at Fortune has a wonderful video on the topic (I could only find a direct link through aol):

But that's why I continue to read this blog, because so much of what you say makes sense.


January 19, 2009 01:21 PM

Great article, I love the graphs.

Another interesting article I read in the Canadian Globe and Mail talks about how Americans increasing their savings is going to crush Chinas export trade in the next couple of years.

Thank you for your interest. This blog is no longer active.



Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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