Twenty Reasons Why We're Not Consuming

Twenty Reasons Why We're Not Consuming

Nouriel Roubini, 11.20.08, 12:00 AM EST

No savings--and a pile of debt.

This week's news about October retail sales (-2.8% relative to the previous month and now down in real terms for five months in a row) confirm that the U.S. has entered its most severe consumer-led recession in decades. At this rate of free fall in consumption, real gross domestic product growth could be a whopping 5% negative or even worse in the fourth quarter of 2008. And this is not a temporary phenomenon: Almost all of the fundamentals driving consumption are heading south on a persistent and structural basis.

Consider the many severe negative factors affecting consumption. One can count at least 20 separate or complementary causes that will sharply reduce consumption in the next several years:

1. The U.S. consumer is shopped-out, having spent for the last few years well above his means.

2. The U.S. consumer is savings-less, as the already low household savings rate at the beginning of this decade went to zero/negative by 2006 and now has to rise to more sustainable levels.

3. The U.S. consumer is debt-burdened, with the debt-to-disposable-income ratio having increased from 70% in the early 1990s to 100% in 2000 and to 140% in 2008.

4. Not only are debt ratios high and rising, debt-servicing ratios are high and rising, too, having gone from 11% in 2000 to almost 15% now, as the interest rate on mortgages and consumer debt is resetting at higher levels.

5. The value of housing wealth is now falling by over $6 trillion, as home-price depreciation will soon be 30% and reach a cumulative fall of over 40% by 2010. Recent estimates of this wealth effect suggest that the effect may be closer to 12%-14% rather than the historical 5% to 7%. And with home prices falling over 30%, about 40% of all households with a mortgage (or 21 million out of 50 million who have a mortgage) will be under water (negative equity in their homes) with a huge incentive to walk away from their homes.