Are American Consumers Tapped Out?

Over the past 25 years, in every quarter except one, American consumer spending rose over the previous year, according to a November BusinessWeek article. Consumers have continued to shop through both good and bad times. Access to easy credit has been responsible for this spending spree. BusinessWeek sees the subprime crisis as the “beginning of the end for the long consumer borrow–and buy–boom.” A recent New York Times report explores the possibility of an impending recession and notes, “It may be an unavoidable step toward purging the U.S. and…global economy of a major source of instability: an unhealthy dependence on the willingness of American consumers to keep buying even as debt mounts.” Since the DRTV industry is heavily dependent on consumer spending, a pullback by consumers could have a big impact on our industry.
 
THE CRUX OF THE PROBLEM
 
First, let’s look at the housing slump and its possible effect on spending. Cheap credit from 2004 to 2006 allowed Americans to take out more than $800 billion a year from their homes, according to the New York Times. So the decline in home prices could definitely impact consumer spending. Christopher Carroll, a Johns Hopkins economist, told BusinessWeek that every $1 decline in housing prices cuts about 9 cents off of spending. The report further shows that a 10- to 15-percent decline in home prices will decrease spending by $200 to $300 billion, which is about two to three percent of personal income. This decline in income is likely to diminish consumer discretionary purchases of apparel, automotive and certain luxury goods. Retailers and marketers of these types of goods could be hit hard if consumers cut spending.