The Battered American Consumer: Even the Upper-Middle Class Is Feeling Economic Pain

one...two...tree · August 20, 2008

By Kathleen Connell, CSM

Bad news continues to batter the American consumer, from negative home equity to weak retail sales and rising claims for unemployment benefits.

One in 3 homeowners who purchased homes since 2003 now owe more than what the property is worth, according to Zillow.com, an Internet service that values more than 80 million homes. The numbers are even more dismal for those who bought in 2006, with 45 percent now experiencing negative home equity.

Equity holdings by households offer no cushion, falling a stunning 41 percent in value for the first quarter of 2008, according to the Federal Reserve's Flow of Funds Report.

Announcements of Wall Street layoffs, bankruptcies of major US retail outlets, and even the decision by Starbucks to close 600 outlets has agitated Americans regarding their future employment.

Reflecting the collapse in housing and equity values, household net worth has dropped for two consecutive quarters, as consumers increasingly depend on credit cards and consumer loans to maintain their lifestyles.

Growing numbers of economists believe that America is now in a transformational economy, where consumer spending may play a lesser role, as households belatedly recognize the need to "right size" their lifestyles. For many families, comparison shopping has become an essential practice.

The mood of economic unease has encouraged even the wealthiest 10 percent of Americans to reconsider their spending, which in 2006 represented 1 out of every 4 dollars spent. The Harrison Group, a market-research consultancy firm, and American Express Publishing found in a June survey that 80 percent of these higher-income households are now looking closely at spending, up from 68 percent in April.

"Even the upper-middle class -- with disposable incomes of $100,000 ... are fearful for their future and concerned whether they can weather the economic storm, continuing to live the lifestyle they are currently enjoying," says Burr Brown, vice president at Harrison. "They have become savvy consumers, looking for value." The survey found 82 percent now waited for sales before buying preferred-brand products.

One sign of thriftier times: IKEA, the Swedish home-furnishings retailer, has grown from 15 stores in 2003 to 35 stores in 2008, recently opening its first US factory and two distribution centers. "IKEA is broadening its customer spectrum with growing numbers of higher income families," says Joseph Roth, the firm's director of public affairs.

Crystal Clayton and Dan Williams, an engaged couple, both IT professionals from Bowie, Md., are regular customers.

"We get the style without spending the money," says Ms. Clayton, joking, "IKEA allows me to have champagne tastes on a Coca-Cola budget." Dan is pragmatic in explaining his more mass-market shopping behavior. "I like to watch my money so that 10 years from today, we have reached our financial goals," he says. "It's a simple return-on-dollars issue for me."

Smart consumers should accept that the economy's challenges are long term, calling for a major downshift in spending. Current borrowing and debt levels are unsustainable. Recognizing the economy's new challenges, spending less will become a necessity. Consider taking the following steps:

Recalculate your net worth, given adverse housing, employment, and investment realities. This can help you avoid overextension based on a too-rosy view. Check out a net-worth calculator at Bankrate.com.
Redefine your long-term financial goals for savings, healthcare, education, and homeownership assuming continued economic volatility -- and keeping in mind rising outlay requirements on many fronts. For more information on specific important topics, visit MyMoney.gov.
Set lifestyle priorities, opting for a life with fewer consumer goods. Separate needed purchases from impulse purchases. See discussions and tips at TotallyFrugal.com.
Challenge your friends to join you in "value added" activities -- local and low-cost, or free -- that do not require you to purchase anything. Search at Free-Attractions.com.
Visit secondhand stores or discount retailers and delight in your new "return on dollars" philosophy.
Embrace this downsizing mentality -- it's the new "cool."

http://www.alternet.org/story/95691/the_battered_american_consumer%3A_even_the_upper-middle_class_is_feeling_economic_pain/

alienlovechild · August 20, 2008

The problem is there are too many people who spend more money than they make on ####### they don't need and haven't learned how to save money. If some people went through some real hard times financially maybe it would wise them up.

w¡n9Nµ7 §£@¥€r · August 20, 2008

Very cool. For anyone who wants to try this, the calculator is at

http://www.bankrate.com/brm/calculators/sa..._calculator.asp

one...two...tree · August 20, 2008

Sounds a lot like the Federal Government under Republican control.

HAL 9000 · August 20, 2008

Hot dayum...

Scott & Lai · August 21, 2008

Sounds a lot like the Federal Government under Democrat control as well. The Republicans didn't invent deficit spending. Whether it's Tax and Spend or Borrow and Spend, the common denominator is irresponsible spending at the expense of the people.

w¡n9Nµ7 §£@¥€r · August 21, 2008

:thumbs:

Every time government increases spending today without an equivalent reduction in spending today or an increase in taxes today, they're effectively increasing taxes on the future.

The problem is, the politicians today were elected in by people today - they're the ones who should have to pay for what they do. Not the people of the future.

Edited August 21, 2008 by A.J.

one...two...tree · August 21, 2008

I realize that's a common misnomer, but the facts say otherwise: (Republican presidents have outspent Democrat presidents)

Since 1938 the Democrats have held the White house for 35 years, the Republicans for 34. Over that time the national debt has increased at an average annual rate of 8.7%. In years Democrats were in the White House there was an average increase of 8.3%. In years the Republicans ran the White House the debt increased an average 9.7% per year. Those averages aren't that far apart, but they do show a bias toward more borrowing by Republicans than Democrats even including World War II.

If you look at the 59-year record of debt since the end of WWII, starting with Truman's term, the difference between the two parties' contributions to our national debt level change considerably. Since 1946, Democratic presidents increased the national debt an average of only 3.2% per year. The Republican presidents stay at an average increase of 9.7% per year. Republican Presidents out borrowed and spent Democratic presidents by a three to one ratio. Putting that in very real terms; for every dollar a Democratic president has raised the national debt in the past 59 years Republican presidents have raised the debt by $2.99[5].

Prior to the Neo-Conservative takeover of the Republican Party there was not much difference between the two parties' debt philosophy. They both worked together to minimize it. However the debt has been on a steady incline ever since the Reagan presidency. The only exception to the steep increase over the last 25 years was during the Clinton presidency, when he brought spending under control and the debt growth down to almost zero.

Comparing the borrowing habits of the two parties since 1981, when the Neo-Conservative movement really took hold and government spending raced out of control, it is extremely obvious that the big spenders in Washington are Republicans and their party's presidents. The only Democratic president since then, Mr. Clinton raised the national debt an average of 4.3% per year. The Republican presidents (Reagan, Bush, and Bush II) raised the debt an average of 10.8% per year. That is, for every dollar a Democratic President has raised the national debt in the past 25 years, Republican presidents have raised the debt by $2.53[6]. Any way you look at it Neo-Conservative Republican presidents cannot or will not control government spending.

http://www.cedarcomm.com/~stevelm1/usdebt.htm

Edited August 21, 2008 by Jabberwocky

kerewin21 · August 21, 2008

But what will happen to our consumer economy if people stop spending more than they have?

Dan J · August 21, 2008

It would go into a retraction, but in the end we would be better off for it.

It costs more to buy with credit than it does with cash you have. So in the end, consumers will be enabled to buy more.

Scott & Lai · August 21, 2008

Both parties have been increasing the debt, that's my point. And a smaller increase on the Democrats part is not necessarily a sign of fiscal responsibility. One, it is still an increase, and B., high confiscatory taxes may result in a smaller deficit, but they create a huge burden on the taxpayer. The deficit is only part of the problem. The deficit needs to be reduced (the change rate should be a negtive number), but it should not be done by increasing taxes or by borrowing at the expense of future generations. The biggest problem is spending, which is way out of control. No business, and no individual, could survive if they behaved the way the government does. Of course, businesses and individuals can't print money, and they can't increase there coffers by confiscating funds from their neighbors. It's called theft when they do that.

Edited August 21, 2008 by Scott & Lai

HAL 9000 · August 21, 2008

Absolutely right. They didn't invent it... they just morphed it into spending on credit.

Mr. Big Dog · August 21, 2008

No, but they've become masters at this.

DeadPoolX · August 21, 2008

The problem isn't really with the Democrats or Republicans, but with American consumers themselves. Yes, both parties spend our tax dollars irresponsibly, but what hits the average American hardest is what they do on a day-to-day basis.

As a nation, we purchase an enormous amount of unnecessary junk. Does anyone really need an iPod? I'm sure you love your tunes, but your 20,000+ song list doesn't have to be handy at all hours of the day. Do you really need a 50-inch wide-screen LCD HDTV? Probably not, since a relatively smaller -- and less expensive -- one would suffice for most uses. Do you really need overpriced designer clothing with the aforementioned designer's name scribbled illegibly all over it, so you can act as a walking billboard? Maybe, depending on the item in question, but for most articles of clothing, it wouldn't really matter too much. Do you really need over a hundred pairs of shoes, most of which you'll only wear once in a while? Once again, no.

This is our problem. We often spend up to or beyond our means and then blame someone else for our own irresponsible monetary practices. I realize that salaries generally rise slower than the overall cost of goods, but shouldn't that tell you we should spend our money on what we need and perhaps save the rest?

Imua · August 21, 2008

For many years I said no - then my CD player died. Have you seen the meager selection of portable CD players in stores lately?? If you're an otherwise frugal person who takes public transportation, an iPod or similar music player is necessary, to prevent them from strangling the neck of the next gum-cracker, nail-clipper, religion-hawker or cellphone-blabberer that they happen to be sitting next to. If you drive and have a music system in your car, then it's probably a luxury. If you're listening to it when you're jogging, you're asking for trouble.

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The Battered American Consumer: Even the Upper-Middle Class Is Feeling Economic Pain

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