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I'm not sure why the story in today's New York Times seems like such a surprise to everyone, The Times headline screams, "Americans Cut Back Sharply on Spending." I've been expecting it ever since the subprime mortgage mess started to hit the news in the middle of last year. People have been using their houses like piggy banks, tapping rising equity each year as the price of their homes continued to climb. Well, the gravy train has since passed in many parts of the country as housing prices plummeted. People can no longer refinance their homes by rolling in their mounting credit card debt or getting yet another home equity loan. So they just don't have the money to spend and they must cut back.
The Times article highlights the cut in spending by wealthier folks, using the drop of 3% in spending by American Express's affluent consumers as a signal that even the well-to-do are hit hard. Saks Fifth Avenue reported slowing growth. Nordstrom (NYSE: JWN) saw a 4% drop in sales. Tiffany's (NYSE: TIF) also saw a drop in sales in December.
The money for spending has dried up as salaries have been flat in recent years while gas prices, home heating fuel and health care costs continue to rise dramatically. The fake it 'til you make it crowd, the kind that helped to boost rising sales in upscale stores, just can't fake it anymore.
While I doubt the truly wealthy are feeling the pinch, that's a very small segment of the population. The top 1% of the population earns $364,657 or more, but that accounts for just 1,316,116 tax filers. The top 5% earn $145,283 or more. That group represents about five million taxpayers. Even in the top 5%, I'm sure there are some 'fake it' spenders who had to cut back on those $500+ dress and $300+ shoe purchases.
Ninety-five percent of tax filers earn less than $145,282 per year. That's more than 135 million tax filers who can't even think about much more than spending on the basics -- housing, health care, food, gas, utilities, clothing and education, with maybe a little put aside for retirement and vacations -- if they want to make ends meet without accessing new credit. On top of these monthly expenses they must also pay off those credits cards that can't be rolled into a new equity loan.
When you take all this into account, I'm not sure what the big surprise is. In fact, I'd expect we're just seeing the beginning of this and spending will drop further. Perhaps much further.
Lita Epstein has written more than 20 books including "Working After Retirement for Dummies."
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Reader Comments (Page 1 of 1)
1-14-2008 @ 2:55PM
mack said...
the gov nedds to lower the amount you have to pay back on cards .I have a finance charge of 17.74 and a minimum payment of 147.00. If thay would row back the amont ,the gov. says need to be paid I would have money to help the u.s
1-14-2008 @ 3:20PM
JR said...
We, the middle class, have to laugh at Bush's tax cuts. He and everyone else knows that it doesn't help us, just the top 5%. We are out of resources and the trainwreck is just in the beginning stages of this mess that he and his puppets created with this illegal war. 400B would have help create a lot of jobs here if it were applied smartly, especailly if it was applied to researching and developing alternative energies.
1-14-2008 @ 3:36PM
Jane said...
Well, I'm sure the economy can survive if Tiffany's sales drop by 3%. And I agree that credit card interest rates are far too high. But the article is quite right about people raiding their equity - and surely we all knew that the valuation of homes was going on at ludicrous annual rates and that someday it would have to drop. So, yes, people should take more responsibility for educating themselves about using credit. Lenders who make obviously unsound loans should be personally prosecuted. People need to stop and think clearly for a while. There will always be a market for items if the price is right. To pay down some excess credit card debt, why not look around the house and see if there's something you never use that you could sell on eBay or elsewhere - and put the proceeds into paying down the cards? Not a solution for not being able to pay the mortgage, but it could help. All this stuff that people have been buying all these years - those things are assets. Someone will give you money for them. Think about it.