The End of Consumerism as We Know It?

CU360
May 4, 2009 | COMMENTS

Consumer spending has, for the past 40 years, accounted for an increasing share of the U.S. economy, totaling nearly 70% of dollars spent. Only twice since 1965, despite half a dozen recessions, have Americans spent less in a year than the previous one.

Conspicuous consumption, however, may be yesterday's lifestyle. America —and much of the rest of the world—now finds itself at a once-or-twice-a-century economic tipping point, according to U.S. News & World Report . Economic recession, job losses, high consumer debt levels, a stagnant real estate market, and the growing green movement together have the potential to transform the economy.

Many consumers, of course, don't have much choice but to scale back. Total credit card debt has increased over 50% since 2000. The average American with a credit file is responsible for $16,635 in debt, excluding mortgages, according to Experian, and the personal savings rate has hovered close to zero for the past several years.

"We're shedding jobs, it's much harder to borrow, and what used to be capital gains are now capital losses," says Scott Hoyt, senior director of consumer economics at Moody's Economy.com. All this has prompted an upward trend in saving and slower growth in consumer spending.

Longer term, an aging population will need to spend less and save more for retirement. The combination of demographic and financial factors will reverse the 40-year spending spree. Consumer spending could actually start falling as a percent of U.S. gross domestic product, at a rate currently difficult to predict.

All Shopped Out

A new frugality might actually be OK with many of us. Ninety percent of recent survey respondents said they were considering options for "the simpler life," according to trend consultant Faith Popcorn. They view having a paid-off mortgage as more of a status symbol than having a beautiful home.

Young consumers in their 20s could be most affected by the shift to simplicity. And because consumers often learn their lifetime shopping habits during their developmental years, Mandy Putnam, vice president at TNS RetailForward, says members of Gen Y might be permanently shaped by today's lessons in austerity, much as their great-grandparents were by the Great Depression.

But what happens when budgets aren't so tight? Some economists say we'll go right back to our prodigal ways. Optimism and the drive to spend are hard-wired parts of America 's cultural DNA, according to Alan Blinder, economics professor at Princeton University and former Federal Reserve vice chairman. Blinder expects that even baby boomers will continue the spending spree that has defined most of their lives, buying medical care and golf vacations instead of new cars and larger homes.

But if Americans do curtail their spendthrift habits, the result would probably be a healthier and more balanced American economy. The recently announced federal budget and various stimulus spending take the U.S. into uncharted territory. If as a nation we bought a bit less and saved a bit more, economists say, the result would be stronger long-term economic growth.