Shopped Out?



I participated in a discussion in today’s WSJ’s (the free Econoblog) on consumer spending, titled Shopped Out?  My cohort in this was Dartmouth College Professor Andrew A. Samwick, author of Vox Baby. Andrew served as the chief economist
on the staff of the President’s Council of Economic Advisers in 2003 and 2004.

Its an explanation of why the consumer is almost — but not quite — tapped out, and the repurcussions of that.

Here’s the intro:

For at least the past decade, anyone who has bet against the resiliency and
unending spending capacity of the U.S. consumer has decidedly lost the wager.
Even through the recession of 2000-01, they hardly slowed their profligate ways.
Sept. 11 managed to create a pause in spending — at least for a short time —
but it was more than made up for in the ensuing quarters. Indeed, the careers of
economists who have declared the U.S. consumer to be tapped out litter the
countryside like corpses after a war.

There are early signs, however, that taking the other side of this bet is no
longer a sure thing. We see a variety of factors suggesting that the consumer,
while not yet exhausted, is slowly but surely moving in that direction. While
it’s premature to declare the American consumer "shopped out," I suspect it’s
now quite late in the cycle. Barring a significant improvement in economic
fortunes, including robust job creation and increased personal income levels,
that exhaustion now looks inevitable.

It was a lot of fun doing this with someone the stature of Professor Samwick. I definitely learned a few things . . .

UPDATE September 6, 2005 6:30 am
To answer a recurrent comment and email about this:  It was written Sunday and Monday, before Katrina made landflall, the levees broke and the magnitude of the disaster was known or understood. The impact of the storm (see this) only exascerbates a deteriorating situation.


Shopped Out?
Barry Ritholtz, Andrew A. Samwick
WSJ’s ECONOBLOG  August 31, 2005

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What's been said:

Discussions found on the web:
  1. hans Suter commented on Sep 2

    The “Tax on the stupid”joke doesn’t really help to understand what betting is about. I’ve done some advertising for a betting company and had to understand what makes people betting.
    There is a small number of heavy betters that that counts for the bigger part of the income of the betting institution. Then there is a huge crowd of small betters that counts for the rest.
    The heavy betters are addicted people, the systems guys who sooner or later go broke. The small guy gets exactly back what he’s paying for: a little excitement for little money: an honest exchange.
    So I would say that a betting entrepreneur offers good value to a lot of people at the expense of the mentally impaired few. And that pays very well.

  2. Larry Nusbaum, Scottsdale commented on Sep 2

    The reason that they have been wrong about the consumer being tapped out is because they have been wrong about when the housing bubble popping. The reason that they have been wrong about the housing bubble popping is because they were relying on historical trends/data/behavior etc which will not apply to this never before period in asset growth.
    That is not to say that the cycle will not end in a year or two. But, there are too many reasons why it has remained strong and they are being ignored.
    For every reason they list for why the bubble should have popped, I can easily take the other side of that argument (and win)…….
    Personal balance sheets remain strong.

  3. Larry Nusbaum, Scottsdale commented on Sep 2

    Housing market defies gloomy forecasts

    Home prices rise even faster than ever, and though some cities may have crested, others remain bargains. See how your city fared.

    By Marilyn Lewis

    Contrary to the expectations of many, the housing market didnī–¹ slow, flatten or plunge in the second quarter.

    Instead, house prices registered the biggest price leap in 26 years, says a report released Thursday by the Office of Federal Housing Enterprise Oversight. House prices rose 13.43% nationally between the end of the second quarter of 2004 to the same time this year. Many observers had been predicting that the housing market was inflated to the point of either bursting or at least politely deflating.

  4. erikpupo commented on Sep 2

    where do you get the data that says personal balance sheets are strong?

    what tells you that?

  5. Larry Nusbaum, Scottsdale commented on Sep 2

    erik: I will tell you that I have read reports that contradict each other on the subject. But, let me ask you this: What do you think has happened to the avergage family’s balance sheet as their home and second home or rental has more than doubled in 5 years or much less in some areas?

  6. erikpupo commented on Sep 2


    Thats money in the ground, unless they tap it through home equity. I dont see how borrowing against the value of your house improves your balance sheet. What if the value of your house went down? You still owe the money you tapped. Now those people who sell houses may make money but the problem they have is they have to buy real estate somewhere else, and in a large number of places it may be pricey, so that money gets piled back into the ground.

    Borrowing against your house doesnt improve your balance sheet; it shifts debt from one line item to another.

  7. The Nattering Naybob commented on Sep 2

    Barry, I laid this on Dave Altig at Macroblog and am leaving it for your consideration as well…

    Has anyone even considered how much money is being generated in the underground economy? When Toronto went hog wild on assets in the late 80″s, most of the economy went underground and has stayed there to this day. Things are bad with regard to McJobs, no benefits and savings rates, but there is a lot of “tax free, barter, underground, black market” money running around these days. These days, things being what they are, a lot of people stay “under the radar” and manage to make ends meet in a lot of strange ways.

  8. Larry Nusbaum, Scottsdale commented on Sep 2

    erikpupo | Sep 2, 2005 :”Borrowing against your house doesnt improve your balance sheet; it shifts debt from one line item to another.”

    Think of when companies refinance short-term with long-term or visa versa. The size of the debt may be the same but, it may do wonders for cash flow.
    Along those lines, many people have been advised to payoff high rate consumer debt with low rate HELOC debt. Many have done that, and their monthly cash flow has greatly improved. I am dead set against such advice.
    Finally, as your house goes up in value faster than your abilty to borrow against it (or spend) isn’t that the definition of increasing equity and an improved balance sheet?

  9. Regis commented on Sep 2

    Hi Larry,
    I’ll have to take the opposition’s side, because while a company can take on additional debt for capitalization (i.e. money that’s going to be used to take on more income), the opposite is true of a house and it’s owner.

    The H2 and the Plasma TV do not bring in additional income to offset the debt load, but simply adds to it. Joe Consumer while enjoying short term cash flow, does have to continue paying back the debt (and even with low interest, a $40K vehicle will end up costing far more than that over time) and relying on ever-increasing equity in an increasingly unstable real estate market.

    I ask, does this sound ‘balanced’?

  10. Larry Nusbaum, Scottsdale commented on Sep 2

    Posted by: Regis | Sep 2, 2005 6:26:52 PM – good post, Regis. I am not going take the opposite view of your post. What I will say is that not all that money pulled out of real estate equity went to consumer spending. A lot of money was reinvested into rental (income) property which has increased people’s net-worth, so far.
    Another rule I live by: Do not borrow from one property (especially your home) to buy another.
    If corporations can remember an important rule of cash-flow management: Use short term debt for short term assets and long term debt for long term assets, they will be better prepared for an economic downturn.

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