The Future of the American Consumer

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Late last week the U.S. Federal Reserve released figures revealing that consumer credit had fallen for the fifth straight month, signalling that a recovery in American consumption was, by no means, just around the corner.
 
About time for such a reality check, one might say.
 
After running up thousands of dollars on their plastic in the past decade or so, some analysts believed the U.S. consumer should take a respite before endulging in yet another splurge; the theory being that the sooner U.S. consumers halted these bad habits, the sooner we could see a recovery.
 
But these falling numbers may well be an indicator for worse times ahead.
 
During the housing boom, consumers could extract equity from their home in order to pay off their, in some cases, astronomical credit card bill at the end of each month. Not anticipating that their property would soon be worth as much as 30 percent less, the housing crash left consumers with a mountain of debt and few prospects for balancing their books.
 
So Congress passed the Credit Card Accountability, Responsibility and Disclosure Act, which prevents banks from "raising interest rates arbitrarily and charging certain fees." The bill, it is hoped, will protect consumers and help put an end to the American consumer's fiscal excess. But will it?
 
Yes, spending on credit is falling. But take a closer look at why. Instead of spending on "white goods" and other products, some analysts believe that credit spending is down because consumers have resorted to using their plastic for essential, cheaper items such as milk and bread. That people are now using credit cards to pay for such goods--items usually paid for with cash--may be an indicator of just how close the U.S. consumer is to insolvency.
 
And with the values of retirement funds plummeting, America's baby boomers, who in 2005 made up 47 percent of consumption, will be scaling back their spending. The credit crunch will see around $400 billion sapped out of the economy as baby boomers increase their savings ratio from 1 percent to 5 percent. Only last month, BusinessWeek predicted that Mercedes-Benz, the "quintessential baby boomer brand," will sell a third fewer cars in the United States.
 
Traditionally, there is about a six-month gap between an economic recovery and a recovery in the consumer economy. This correlation may well now be redundant. The U.S. banking sector is by no means out of the woods, and given precarious household finances and the safety of retirement funds, the American consumer is unlikely to have the means to spend like it's 1999.
 
Consumerism in the U.S. economy may well take decades to recover.