The American consumer seems to have changed fundamentally. After decades of aggressive, some would say reckless spending and borrowing, households since the 2008-09 great recession have exhibited an atypical caution about spending and borrowing both. That caution itself has contributed to the disappointingly slow pace of overall economic recovery and, until recently, the poor rate of jobs growth as well, trends that have fed back to exaggerate the consumer caution born in the recession. Whatever the causes or other feedback loops involved, recent declines in retail sales speak to the persistent nature of this new consumer hesitancy and the likelihood that it, and its more general retarding effects, will persist.
The Old American Consumer and the Great Recession
For decades before the great recession, the American consumer could only be described as a spending enthusiast. He and she seemed to spend each additional dollar of income and borrow to buy what their current incomes could not support. During the housing boom between 2003 and 2007 these well-established patterns reached extremes. Households leveraged rising real estate values, used their home, in the expression of the day, as on ATM. Spending rose at almost 6.0 percent a year, far faster than the 5.5 percent rate of income growth. According to the Federal Reserve (Fed), household borrowing during this time jumped $4.6 trillion or at a 10.0 percent annual rate. Most telling of all, household savings rates remained miniscule, averaging a mere 3.5 percent of after-tax income and falling at times to as little as 2.0 percent.
The carnage of the great recession showed the downside to such behavior. The burden of debt payments had risen to almost 20.0 percent of after-tax income. Even those who kept their jobs and incomes had to cut back on spending when the flow of credit dried up. Of course, it was that much worse for the 8.7 million people who lost their jobs during that time. Many who had leveraged themselves to buy more real estate than was prudent lost their homes as delinquency rates climbed to an astronomical level of 11.3 percent of outstanding residential mortgages. As real estate values fell, many of those who managed to hang on found themselves stuck with mortgages that exceeded the value of their property. To say it was a sobering experience, even for those who kept their jobs, would stand as a gross understatement. The slow pace of recovery after 2009 only reinforced the new cautious attitude. Jobs especially disappointed, at times growing at only half the rate to which this country had become accustomed. The weak labor market even caused households to question what had been well-worn paths to middle-class security.
A New Attitude
And so a change has occurred. Households have budgeted with a reinforced caution that seems foreign to their otherwise long-standing earlier behavior. Though slow jobs growth in this recovery has kept income growth comparably slow, consumers have kept their spending growth even slower and governed their use of debt still more exactingly. According to the Commerce Department, incomes grew 4.1 percent a year between 2009 and 2013 but spending increased only 3.6 percent a year. Fed statistics actually show that households cut their debt outstanding 2.0 percent during that time. Consumers maintained a savings rate of almost 6.0 percent of after-tax income, high indeed by past standards. After those brief periods when spending outpaced income and household savings rates fell below 5.0 percent, subsequent quarters saw remarkable (at least for Americans) spreading restraint as families strived to re-establish their higher savings rates. In late 2013, for example, when such relative spending growth pushed that rate down to 4.8 percent, the early part of 2014 saw spending growth enough below income growth to push the savings rate back up over 5.0 percent by the spring quarter.
Little speaks so thoroughly to this new attitude and its seeming staying power than consumers’ reactions to the recent drop in energy prices. During the past eight months, the price of a barrel of oil has fallen by more than half with comparable declines in the prices of gasoline, natural gas, and fuel oil, if not electricity. Since, according to the Labor Department, the average American budgets 8-10 percent of his or her spending on such fuels, the price decline was tantamount to a 4.5 percent jump in real income. In the past, households would have quickly spent that boon, effectively redirecting the savings at the pump to additional outlays on all kinds of goods and services. But that is not what has happened. During the past few months, as the full effect of energy savings have hit household budgets, spending, far from picking up, has actually declined. Retail sales have dropped for the last three consecutive months by a cumulative 3.8 percent, and broadly, too, not just the obvious decline of monies spent at the pump. The move is still more remarkable because hiring and so aggregate incomes have picked up at the same time. A lack of data makes it impossible to know if households have used the break on fuel expenses to pay down debt, but it is apparent that savings rates have jumped, by more than half a percent of after-tax income in fact, through January, the latest period for which complete data are available.
Perhaps households distrust the staying power of low oil prices. That would be wise. Thought the world has found many new sources of oil and gas, still 30-35 percent of its oil passes through the Persian Gulf, a region prone to the kinds of trouble that could easily raise prices again very quickly. But even if the household distrust were misguided, it speaks to the continuing influence of the new caution born in the great recession and evident since. In time, older, more expansive attitudes may well reassert themselves. But for the time being, it appears the self-restraint will prevail, slowing the pace of consumer spending growth and, since the household sector still constitutes some 70 percent of this economy, the pace of overall economic growth as well.