The inexplicable American Consumer

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This must be one of the big conundrums in American behavior: Even as things keep getting worse for consumers, they borrow and spend more, thus digging themselves deeper into the very hole they’re complaining about.

The Conference Board reported its August numbers today, and they’re truly ugly: Its Consumer Confidence Index fell from an already low 59.2 in July to 44.5, the Present Situation Index fell from 35.7 to a catastrophic 33.3, and the Expectations Index that looks six months into the future got slaughtered, crashing over 30%, from 74.9 to 51.9. A move like this gives you the economic willies.

Consumer confidence hovered around 140 from 1999 to 2001, its peak period, when it was really fun being a consumer, but then began to unravel in a downward zigzag with sharp declines from 2001 to 2003, mild upswings from 2003 to 2007, and a crash from 2007 to early 2009, the low point of the financial crisis, when it dipped into the 20s. Since then, it experienced another upswing, reaching the 70’s earlier this year. Now it’s headed back into the bowels of darkness: The last time it saw today’s level of 44.5 was in April 2009.

And yet, consumer spending, reported yesterday by the Commerce Department, grew by 0.8% in July, of which half was due to our red-hot inflation. This was particularly astonishing since real income (adjusted for inflation) continued its morose decade-long decline—that this decline is roughly parallel with the decline in consumer confidence is perhaps no coincidence. But the difference between lower income and higher spending was resolutely dealt with the American way: by borrowing. The Federal Reserve has been reporting surprising increases in consumer borrowing over the last few months.

That spending continues to increase when real income gets clobbered, and that borrowing is used to make up the difference is astonishing on a logical basis, and I simply don’t get it. It creates an ever bigger pile of debt that needs to be paid off with ever lower real incomes, a mathematical impossibility. It’s a strategy without good exit.

And yet we do it on every level, from the Federal Government on down, as the debt-ceiling debacle has shown us all too clearly. Perhaps, piling on debt we can’t repay has become part of our DNA.

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