The Urge to Splurge
Theil, Stefan, Newsweek
Americans are spending again--whether they can afford to or not. So much for the 'New Austerity.'
No interest until 2014," read the massive red sign outside big's furniture in Henderson, Nev. It beckoned Diane Lewis to the store's year-end liquidation sale. "I had to pull in," she said as her sons frolicked on mattresses nearby. "We really need to get us a new bedroom set; their old one is kinda beat up. If we can get that financing deal, we can make it work." As with most in this hard-hit region, the economy hasn't been good to Lewis, whose husband just got a new job after being laid off for eight months.
They're two months behind on their mortgage, "but we're gonna catch up," and she figures the family probably owes about $20,000 on various credit cards. "I know I probably ought to wait a little longer," said Lewis, a hairdresser, "but this is a pretty good sale, so I think we might buy something if they'll approve us. I mean, 2014 is a long way off, you know?"
Old habits die hard. It was only last year that shell-shocked consumers were pledging their allegiance to the "New Frugality." Chastened by the brutal lessons of the worst economic downturn in decades, Americans swore off conspicuous consumption and resolved to embrace the thrifty ways of their grandparents who lived through the Great Depression. But as any dieter can tell you, resolutions are made to be broken.
Even as Americans are still struggling to meet mortgage payments, pay off credit cards, and replenish savings, they're also starting to spend again--whether they have the money or not. Last week, fresh numbers showed household spending rising for the fifth month in a row and consumer confidence reaching its highest level since June. Per capita retail sales are now back up to where they were in the fall of 2008, just before the collapse of Lehman Bros. tore the bottom out of the economy. If you factor out spending on cars, which is still 18 percent below its 2005 peak, Americans' total spending on goods and services has now passed pre-crisis highs.
"People are going through frugality fatigue," says Marshal Cohen, chief analyst at NPD Group, a market-research company. That's one reason retailers expect this holiday-shopping season to be the busiest since at least 2007, with a gain of 2.3 percent over last year's sales. Retailers are betting on pent-up demand for electronic gadgets, clothes, and luxury goods, not just the tightfisted bargain hunting that drove sales all during the downturn, says Cohen. Only 56 percent are offering heavy markdowns on their products, versus 96 percent a year ago.
It would be premature to herald the triumphant return of the American consumer as the engine of renewed economic growth, which is what happened during the recoveries following the 1990 and 2001 recessions. There's still too much economic uncertainty--between unemployment that's nearly 10 percent, the rising cost of basics like medical bills and child care, and the renewed slide in home prices that began in recent weeks.
But neither are we witnessing the renaissance of the frugal American. Even though 89 percent of Americans tell Gallup they're watching their expenditures very closely, spending is heading back up anyway. "The story everybody wants to tell is that we've learned our lesson and will be thriftier going forward," says Karen Dynan, a household-finance economist at the Brookings Institution. "But I don't feel we have."
Yes, American households have pared their debt--from $12.5 trillion in 2008 to $11.6 trillion at the end of September, a drop of 7.6 percent. But the lion's share of the decline has come as a result of home foreclosures and defaults on credit-card debt--hardly an indicator of improved habits of personal finance. Yes, Americans are now putting away more money: 5.7 percent of disposable income, compared with just 0.8 percent in 2005. But that's already back down from 7. …