November 24, 2009
A dramatic reduction in consumer spending has doomed the US economy to slow growth and deflation, according to Gary Shilling. America’s 25-year spree of profligate spending is over, and it will be supplanted by a decade-long retrenchment that will ultimately bring the consumer savings rate from 4% to double-digits, where it has not been since the mid-1980s, he said
Shilling, who runs an eponymous Florida-based consulting and investment management firm, spoke at the Financial Advisor Symposium in Orlando on November 9.
The death of the consumer
Shilling said increased consumer savings are not reflected in current equity valuations or in the thinking of most economists. The rally that began in March, he said, “implies that something is going to happen in the economy – we are going to have a v-shaped recovery.” Only a revival in consumer spending can produce the growth in earnings necessary to justify current valuations, according to Shilling.
Shilling does not share the view that robust consumer demand justifies market valuations. “I think consumers have really changed and have reached a watershed.”
Backing up his claim, Shilling said consumers saved all their tax rebates in the summer of 2008 and their $250 Social Security rebates this spring. Those rebates went to lower- and middle-income segments, reflecting a “tectonic shift” across the consumer landscape.
Shilling also presented data that will be familiar to readers of these pages, showing, for example, that the ratio of consumer debt-service payments to disposable personal income has risen steadily from just above 10% in 1980 to 14% last year but have since leveled off as increased consumer savings have been used to pay down debt.
Consumer saving has declined by a half-percent annually since the mid 1980s, meaning that spending was increasing a half-percent faster than annual income.
The cause of the consumer’s death identified by Shilling was unsurprising – the crash in housing prices crippled buying power, he said, noting that one-third of all mortgages are now underwater. The poor performance of US equities over the last decade further impeded spending, leaving consumers with few assets against which to borrow.“People have an awful lot of pressure to save because they have run out of sources of borrowing,” Shilling said, noting that the decision to cut back on spending was not voluntary.
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