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What has been remarkable about the spending performance of consumers over the past five years has been their ability to stay in the game. In the face of war, recession, terrorist attacks and hurricanes, the consumer continued to spend. You have to go back to the recession of 1990–91 to find a time when consumers actually pulled back the reins on their spending, at least until now. After 56 consecutive quarters of growth, consumers appear to have pulled back in the fourth quarter of 2005. Auto companies have taken the biggest hit to their top lines so far. Auto sales are down as much as 10 percent from a year ago. As the auto companies return to heavy promotions, the pain of slower consumer spending is sure to spread.

As a result of this 14-year spending spree, consumer spending as a share of the economy has soared. Between 1970 and 1995, the share of the economy going to consumer spending averaged 66.5 percent. In the following 10 years, the share going to consumer spending rose to a peak of 70.9 percent. A reversion to mean over the next decade will result in the annual growth of consumer spending lagging the broad economy by an average of one percent per annum.

Real Consumer Spending as a Share of Real GDP
Percentage

Source: U.S. Bureau of Economic Analysis

This surge in consumer spending has produced a number of imbalances in the economy. Among them are an unprecedented trade deficit, accelerated growth in foreign ownership of U.S. debt, and a negative savings rate. None of these developments are sustainable and if left unaddressed, hold the seeds of the next recession.

The surge in consumer spending has contributed to the explosive growth in the trade deficit. When consumer spending as a share of GDP rose by four percentage points over the last decade, the trade deficit deepened by almost a similar amount.

A trade deficit in and of itself is not a bad thing. As long as foreigners are willing to buy more dollar-denominated assets, Americans can consume six percent more than they produce. The foreign buyer of choice over the past few years has been China. The Chinese have an obvious vested interest in seeing Americans continue to consume, since it is increasingly Chinese goods that they are consuming. As the share of GDP going to consumer spending declines, the trade deficit as a share of GDP will improve. The relative underperformance of consumer spending is central to improving the U.S. trade deficit and reducing this source of imbalance and instability in the U.S. economy.

The Housing Market as Consumer ATM
Over the past three years, low mortgage rates have allowed the housing market to operate much like an ATM for consumers. The rising value of homes coupled with low interest rates and an aggressive refinancing industry has made it easy for consumers to tap into the equity in their homes.

In recent years, money coming from mortgage refinancing accounted for as much as 60 percent of the increase in consumer spending. Even a small reduction in the flow of cash pouring out of home equity will put a squeeze on consumer spending.

Using asset refinancing to fuel consumer spending has pushed consumer savings into negative territory for the first time since the Great Depression. While the savings rate is far from a perfect measure of consumer financial health, the fact that it has declined into negative territory should be a subject of some concern. At -1.7 percent of income, even a small rebound in personal savings to +2 percent over the next year will take a significant bite out of consumer purchasing power.

Implications for Food Stores
It is not uncommon for retailers of all stripes to plan for their future by looking squarely in the rear view mirror. Looking backward, things look pretty good. The mistake that many food stores could make this year is to expect the good times to roll on. With debt levels high and savings low, consumer spending in both food and non-food categories will slow. Food stores should plan their in-store inventory and labor costs as conservatively as possible.