Recently, a noticeable shift has occurred in U.S. consumer behavior, raising concerns about the economic landscape. The anticipation of steady economic growth fueled by consumer spending appears to be waning. Instead, consumers seem to be pulling back from making significant purchases.
According to a report from the Commerce Department, retail and food services sales in the U.S. for March experienced a decline of 0.3 percent compared to February. This decline signals that consumers are cutting back not just on auto purchases but also on dining out, shopping for clothing, and visiting department stores. Notably, sales figures have either fallen or remained stagnant across the first three months of the year.
“We’re witnessing a marked decrease in impulse buying,” noted Randal Weeks, the owner of Gray Living, a home décor store in McKinney, Texas. He added that many of his customers have expressed a desire to “go home and think about it.” Similar sentiments are emerging from retailers nationwide, raising the question: what is driving this consumer hesitation?
Bob Phibbs, CEO of The Retail Doctor, a consulting firm based in Coxsackie, New York, attributed some of this uncertainty to a stock market decline of over 10 percent within a span of six weeks, as well as the recent terror attacks in Europe. Weeks also mentioned that the upcoming presidential election has left some customers feeling anxious about the future.
While these explanations may offer some insight into the current consumer sentiment, such factors haven’t traditionally deterred spending to this extent. Thus, something more significant seems to be at play.
Doing the Opposite
Reflecting on the economic situation of 2000, during the fallout from the tech bubble, Dallas Fed President Robert McTeer famously suggested that the economy would recover if consumers simply banded together and purchased SUVs. The Federal Reserve subsequently made credit extremely accessible, encouraging consumers to borrow and spend, which many did for years—especially in a post-9/11 climate where consumption was likened to patriotism.
Central bankers believed that by artificially suppressing government bond yields, they could stimulate lending from big banks and create a surge in consumer demand, which would ultimately drive economic growth and push inflation toward the Fed’s 2-percent target. However, this theory has not translated into reality.
As interest rates have dropped, growth has stagnated. Presently, Swiss and Japanese 10-year government bonds even yield negative returns, meaning investors are, in essence, paying these countries for the opportunity to lend them money. Despite this, consumers are not increasing spending; instead, they are hoarding cash.
The Fed’s ongoing emphasis on stimulating growth through cheap credit is also noteworthy. The U.S. 10-Year Treasury note currently yields around 1.7 percent, but even this minimal rate is producing outcomes contrary to the Fed’s objectives.
It appears that government economists have fundamentally misunderstood the effects of their policies. Instead of encouraging borrowing and spending, the low or even negative interest rates seem to be fostering an environment where consumers prioritize saving.
Double Whammy Economics
Interestingly, Larry Fink, CEO of Blackrock, recently elaborated on the paradox that ultra-low interest rates inhibit spending while promoting saving in his annual letter to shareholders. A key excerpt states:
“Insufficient attention has been devoted to the detrimental impact of these low—and now negative—rates on investors’ ability to save for the future. To achieve a desired retirement income, a 35-year-old, for instance, would need to invest $178,000 today in a 5 percent interest rate environment. However, under a 2 percent interest rate scenario, this same individual would need to allocate $563,000—3.2 times more—to reach the same retirement income.”
“This stark reality carries profound implications for economic growth. Consumers saving for retirement may feel compelled to curtail their spending, while retirees with diminished incomes will also have to cut back. Thus, a monetary policy designed to foster growth risks inadvertently stifling consumer expenditure.”
This critical insight seems to have eluded the Federal Reserve and its counterparts globally. Central banks’ efforts to boost demand through persistently low interest rates have not only faltered but have also led to considerable misallocation and malinvestment of capital assets.
Today, we see capital being misdirected into U.S. stocks and Treasuries, residential and Chinese real estate, emerging market equities, mining materials, fracked oil wells, and virtually every conceivable financial asset.
The twofold effect of restraining economic growth while inflating financial assets can have dire financial and economic repercussions. We are gradually uncovering the extensive damage resulting from these policies. In time, the full scope of this destructive impact will be revealed.
Sincerely,
MN Gordon
for Economic Prism