Is the U.S. Consumer Acting Like a Spoiled Brat?

Investing in the market over the past decade has been nothing short of a rollercoaster ride, with all-time highs giving way to decade-lows in 2009, only to see new all-time highs once notched by the Dow Jones Industrial Average (DJINDICES: ^DJI  ) and S&P 500 (SNPINDEX: ^GSPC  ) just four years later.

Source: Great Valley Center, Flickr.

Arguably, everything has gone right for investors and the companies that make up those indexes over the past four years. The unemployment rate has fallen in a slow but steady manner as part-time hiring has really picked up year-to-date. Similarly, record-low lending rates have spurred businesses to expand and have allowed both consumers and business to refinance their existence debt at substantially better interest rates. This is one of the many reasons the housing sector has been able to find a bottom and why homebuilders are now able to utilize low inventory levels to their advantage to improve their pricing power. Even the U.S. budget deficit has narrowed from four years ago, as the sequester has required the removal of $85 billion in spending from the federal budget.

It may not seem like the perfect scenario for the U.S. consumer, but all things considered, they've been absolutely spoiled since the recession. The Federal Reserve has enacted not one, not two, but three separate monetary easing programs catered to buoying a still fragile U.S. economy, and it has kept its federal funds target lending rate at a historic low to spur commercial and personal spending. And how, you ask, has the consumer acted since May? Like a spoiled brat!

The U.S. consumer says, "I'll do what I want!"
Since the beginning of May, when the Federal Reserve first hinted that ongoing positive economic data may cause it to begin paring back its $85 billion in monthly bond purchases, 30-year mortgage rates have increased by roughly 120 basis points to 4.57%. Over that same time span, mortgage applications, which include refinancing as well as new home loan originations, have fallen in 15 of the past 18 weeks and are now 59% off their early May high. Furthermore, August's U.S. retail sales data pointed to an ongoing theme from teen retailers that consumer spending is weak.

On one hand, I can empathize with American consumers in that they want the best possible deal for their hard-earned cash. Why pay 4.5% on a mortgage when you could have gotten it for 3.625% just five months ago?


Source: Freddie Mac; each date represents an advancement of two years (thus 04/02/1971, 01/05/1973, 10/11/1975, and so on). 

Then again, look at that chart and tell me exactly how the consumer is getting a bad deal. The minuscule blip on the far right is the latest "spike" in 30-year mortgage rates, and while we're sitting at our highest interest levels since April 2011, the current rate of 4.57% is about 200 basis points below where we were when the market peaked in 2007, around 375 basis points lower than right before the dot-com bubble burst, and close to 600 basis points lower than when the Gulf War scared investors back under their bedsheets in 1991. At no time in history has the Fed catered to the needs of the American consumer as it's done over the past couple of years, and consumers are sticking their noses up in the air at even the slightest bump higher in lending rates.

How the spoiled U.S. consumer could kill this rally
Why is this a problem, you ask? For one, consumers' unwillingness to accept historically low lending rates could stymie any chance the homebuilding industry has of getting firmly back on its feet. Homebuilders have been purposely keeping their inventory levels down to maintain pricing power and instill a sense of urgency into homebuyers -- yet a 59% decline in mortgage applications is certain to ruffle some feathers in the housing industry. The larger and more diversified players, such as D.R. Horton and Lennar, probably aren't too concerned, but higher-end homebuilder Toll Brothers (NYSE: TOL  ) should be concerned. Focusing on luxury homes means the ability for some of Toll Brothers' clientele to pay for homes in full. However, for the majority of homebuyers who do choose to finance their purchase, higher interest rates could quickly price potential luxury-home buyers out of the market and hurt Toll's bottom line.

Another loser here would be banks. Now, keep in mind that banks would benefit from higher interest income earned on deposits and investments, and would potentially reap higher interest income on credit cards and loans. The concern is that higher interest rates will crush new loan originations and refinancing, as the mortgage application data has clearly shown. The end result has been layoffs throughout the mortgage service sector. Bank of America (NYSE: BAC  ) let 2,100 people go earlier this week because of weak mortgage refinancing demand, while Wells Fargo laid off 2,300 people from its mortgage service division last month. Although higher rates will eventually favor banks such as B of A, the near-term rapid decline of mortgage service fee revenue could hamper its bottom-line results faster than it can reap the rewards of higher rates.

Another potential loser here would be retailers (surprise, surprise, right?). The retailers in question could represent everything from automakers such as General Motors to jewelry stores such as Zale (UNKNOWN: ZLC.DL  ) . Why bother mentioning GM and Zale, two completely unrelated companies? Because these two companies make products -- cars and jewelry -- that are often purchased with credit. As interest rates rise, the amount that GM's finance arm or that Zale's store credit card charges is probably going to rise as well. If consumers are proving this stubborn about a 120-basis-point rise in 30-year mortgage rates, imagine how quickly they may holster their disposable cash if businesses raise their credit card APRs as well. For a company like Zale, which took a bridge loan in 2010 just to keep afloat, it needs interest rates to remain low so buyers aren't discouraged from charging to their Zale card at the current 23.73%-28.99% variable interest rate.

There's obviously a lot on the line for the Federal Reserve as it considers paring back its monetary easing program known as QE3. What we do know is that the Federal Reserve simply doesn't have the funds (or need) to continue introducing free money into the economy each month. In other words, the artificial interest-rate buffer that's helped keep lending rates low is going to go away whether consumers want it to or not and, in many cases, they'd be absolutely foolish not to take advantage of these historically low lending rates currently available. The problem is that if consumers don't realize this, we could be in for big trouble.

Millions of Americans waited on the sidelines since the market meltdown in 2008 and 2009, too scared to invest and put their money at further risk, similar to how prospective homebuyers are holstering their cash now. Yet those who've stayed out of the market have missed out on huge gains and put their financial futures in jeopardy. In our brand-new special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal-finance experts show you why investing is so important and what you need to do to get started. Click here to get your copy today -- it's absolutely free.


Read/Post Comments (12) | Recommend This Article (6)

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  • Report this Comment On September 15, 2013, at 2:19 PM, kkrimmer wrote:

    Wall St runs America businesses and government.

    "The People's Advocate" by Daniel Sheehan http://tiny.cc/4psc1w

    "The Fine Print" by David Cay Johnston http://goo.gl/KW6Lv

    "Republic Lost" by Harvard law professor Lawrence Lessig http://tinyurl.com/3mdlcrd

  • Report this Comment On September 15, 2013, at 2:24 PM, psychdude1 wrote:

    Economics is local. Regardless of the administration's touting of an economic recovery many families have not experienced this recovery and an increase in parttime employment is only appealing to a teenager. Adults cannot make a living working parttime and when Obamacare kicks in parttime will likely become the new norm. I know that firms in our area including at least one local municipality are quietly laying people off and the expressed reason at least published by the local municipality was a desire to cut costs and to avoid Obamacare. Individual incomes are the primary influence on individual consumer sentiment. So, before taking all American consumers to the woodshed for being spoiled brats and not spending money, keep in mind that some have no money to spend.

  • Report this Comment On September 15, 2013, at 2:41 PM, macarthur1 wrote:

    Spoiled Brat fits the behavior of most Americans these days. More people than ever are turning away from God, refusing to spank their children and refusing to accept discipline themselves.

    That's why the Baby Boomers racked up $17 Trillion debt while the Greatest Generation actually reduced the debt tremendously after World War II.

    People buy houses they can't afford, take out loans and mortgages that they never intend to pay back. Then when the banks go broke from these same people who defaulted their mortgages, they blame Bush instead of THEMSELVES.

    In similar fashion, they re-elect Obama and the Democratic Party, another irresponsible group who blames the other party and never takes responsibility for THEMSELVES, and also spends tax dollars beyond their means racking up Trillions more in debt each year.

    The new motto of our undisciplined society: "Ask not what you can do for your country but what your country can do for you"...

    A new dictator is rising to power who will discipline the people and overrule the power of the US President, Congress, Supreme Court and Military. He often goes by the names "Great Depression" and "Poverty". Only when an entire generation becomes disciplined, frugal, humble and God-fearing like the WWII Greatest Generation when they were raised with very little, then will the dictator be overthrown.

  • Report this Comment On September 15, 2013, at 3:55 PM, clutch1958 wrote:

    How does printing money to prop up Wall Street help the consumer?

    They could have paid all US adult citizens 1 million dollars each, and that would have stimulated the economy more than propping up the stock market.

  • Report this Comment On September 15, 2013, at 3:57 PM, clutch1958 wrote:

    The real spoiled brats were the Obama voters that whined until they got what they wanted from the government.

  • Report this Comment On September 15, 2013, at 4:14 PM, captaintodzilla wrote:

    "If there isn't justice for the people... let there be no peace for the government..." Doing the same thing over and over is insane. Fix America First. Prioritize , a good example is the best teacher. Recycle America. Create Accountability. Build a new Society before retiring the old decrepit one we have now. Build a new Government before retiring the old decrepit one we have now. Build a new Economy before retiring the old decrepit one we have now. Build a new Educational System before retiring the old decrepit one we have now. Build a new Judicial System before retiring the old decrepit one we have now. build new bridges and a new electrical grid ,prioritize people family and children ......turn things around......provide jobs completing the above task.....take the elites jobs and money they have done it to the working class. build a good foundation then rebuild. reinstate common sense. create accountability. and most of all treat our cancers greed , ignorance and self-entitlement. exile our prisoners and bring back labor camps so our prisoners make us money or at least don't cost us any. secure our borders . invest in our children and education more than politics. I would use morals and common sense good leadership and with gods help I would do it with the strength of the people of the USA. I would arrest thief's and thugs not granny's smoking weed.(meaning prioritize) there are so many simple solutions to our problems but so many master debaters. GREED IGNORANCE AND SELF-ENTITLEMENT ARE THE CANCERS KILLING OUR SOCIETY all the other #$%$ slewn by the media and politicians and churches are the things they use to keep your attention elsewhere like a magicians slight of hand while you focus on their shenanigans your children and your children's children are being exploited for the 1%'s benefit because our society works well for them and they can afford to keep it that way. if they want change FIX AMERICA FIRST. its simple to do for the rich. get a Honest President to declare ww3 so they cant get rid of him before his changes take hold. go to war against GREED , IGNORANCE, SELF-ENTITLEMENT, AND POLITICAL CORRECTNESS send our prisoners off to countries were at war with not our children. use our military as a border. change the charity margins so 70% goes to the charity and 30% go to the fundraisers (opposite of how it is now) invest in our children more than our prisoners. make all public office wages same as minimum wage. cap profit margins in America I don't like paying for the mistakes of others. gas prices went up after the bp oil spill because they wanted to recover their losses. our society runs the way it does because it is designed that way for the rich by the rich. their are many common sense simple ways to change things to make a better world to live in. legalize marijuana god made it man banned it, the rich cotton farmers were afraid of the hemp industry would make them poor. legalize prostitution maybe less children will get abducted. until we can prioritize correctly , have accountability , and worry about the American instead of the American dollar things will remain perverted. Anyone can find fault -- it's not a sign of anything other than moderate brain activity. It's much harder to offer creative criticism that actually improves the situation for everyone involved UNITED we stand divided we fall...there is only one race the HUMAN RACE all the divisions of political parties and skin color have demoralized this country into a sewage plant of lying stealing ignorant greedy self-entitled hypocritical idiots the government has had too much money power and time with too little results actions speak louder than words. vote Todd Higgins for president I would use common sense and high morals.

  • Report this Comment On September 15, 2013, at 4:15 PM, captaintodzilla wrote:

    "If there isn't justice for the people... let there be no peace for the government..." Doing the same thing over and over is insane. Fix America First. Prioritize , a good example is the best teacher. Recycle America. Create Accountability. Build a new Society before retiring the old decrepit one we have now. Build a new Government before retiring the old decrepit one we have now. Build a new Economy before retiring the old decrepit one we have now. Build a new Educational System before retiring the old decrepit one we have now. Build a new Judicial System before retiring the old decrepit one we have now. build new bridges and a new electrical grid ,prioritize people family and children ......turn things around......provide jobs completing the above task.....take the elites jobs and money they have done it to the working class. build a good foundation then rebuild. reinstate common sense. create accountability. and most of all treat our cancers greed , ignorance and self-entitlement. exile our prisoners and bring back labor camps so our prisoners make us money or at least don't cost us any. secure our borders . invest in our children and education more than politics. I would use morals and common sense good leadership and with gods help I would do it with the strength of the people of the USA. I would arrest thief's and thugs not granny's smoking weed.(meaning prioritize) there are so many simple solutions to our problems but so many master debaters. GREED IGNORANCE AND SELF-ENTITLEMENT ARE THE CANCERS KILLING OUR SOCIETY all the other #$%$ slewn by the media and politicians and churches are the things they use to keep your attention elsewhere like a magicians slight of hand while you focus on their shenanigans your children and your children's children are being exploited for the 1%'s benefit because our society works well for them and they can afford to keep it that way. if they want change FIX AMERICA FIRST. its simple to do for the rich. get a Honest President to declare ww3 so they cant get rid of him before his changes take hold. go to war against GREED , IGNORANCE, SELF-ENTITLEMENT, AND POLITICAL CORRECTNESS send our prisoners off to countries were at war with not our children. use our military as a border. change the charity margins so 70% goes to the charity and 30% go to the fundraisers (opposite of how it is now) invest in our children more than our prisoners. make all public office wages same as minimum wage. cap profit margins in America I don't like paying for the mistakes of others. gas prices went up after the bp oil spill because they wanted to recover their losses. our society runs the way it does because it is designed that way for the rich by the rich. their are many common sense simple ways to change things to make a better world to live in. legalize marijuana god made it man banned it, the rich cotton farmers were afraid of the hemp industry would make them poor. legalize prostitution maybe less children will get abducted. until we can prioritize correctly , have accountability , and worry about the American instead of the American dollar things will remain perverted. Anyone can find fault -- it's not a sign of anything other than moderate brain activity. It's much harder to offer creative criticism that actually improves the situation for everyone involved UNITED we stand divided we fall...there is only one race the HUMAN RACE all the divisions of political parties and skin color have demoralized this country into a sewage plant of lying stealing ignorant greedy self-entitled hypocritical idiots the government has had too much money power and time with too little results actions speak louder than words. vote Todd Higgins for president I would use common sense and high morals.

  • Report this Comment On September 15, 2013, at 5:19 PM, Hypochondriac wrote:

    This article is offensive and out of touch. It blames the American worker for the lack of demand in the US economy. Low wages and high unemployment are depressing the housing market, along with the economy in general. Neither of these are things that people choose.

    It also doesn't help that investors buoy housing prices by purchasing them and leaving them vacant. If housing were allowed to drop to appropriate levels, there would be more home purchases by regular people who need places to live.

  • Report this Comment On September 15, 2013, at 6:03 PM, helltrent wrote:

    Spoiled? Hardly. How about BROKE?

  • Report this Comment On September 15, 2013, at 6:26 PM, tammyjk wrote:

    Middle class America has watched their paychecks dwindle, their 401k's devastated and so on while banks enjoy free money and Wall Street posts record profits. We read about all the new billionaires and wonder when that recovery will reach us.

    I'm not purchasing a new car, taking a vacation or anything I do not absolutely need. I purchased a new home, but I didnt trade up ...in fact my payments are lower now.

    Perhaps when middle America's pay checks catches up to Wall Street they can afford to spend once again....until then call me spoiled.

  • Report this Comment On September 16, 2013, at 12:52 AM, fingerlakes54 wrote:

    The American consumer are not spoiled Brats. If you want more loan activity I suggest that banks rely less on Credit Reports that cuts a potential borrower off at the knees from the get go. It seems there is a double standard between corporate borrowers and individuals. Who could have a worse credit report than the big banks that failed so miserably in 2008. Yet somehow--individual borrowers must carry the bad news around about their tough times for the last 5 years. Corporations get a green light and can even file for bankruptcy many times --even in a one year period and that is OK. Yet the individual can only file for bankruptcy every 7 years. The list goes on and on. Corporate America is the new Royalty and individuals are the serfs. If the playing field was leveled and Credit Reports were 100% correct, and a little forgiveness built in we could get the borrower to take out loans like before. It's time for regulators, Credit Reporting Agencies, and the Fed to get a life.

  • Report this Comment On November 28, 2013, at 6:09 AM, totoro0101 wrote:

    So let me get this straight. Not only are all the new grads entering the job market "spoiled" (and let's not consider older workers because, well, they're OLD!). The unions are "spoiled", anyone with the temerity to protest bonuses amid the bailouts is "spoiled" and now it seems that consumers who cannot ante up more money are also "spoiled". Well let's just throw up our hands and wail to the stars above, what is a poor downtrodden executive to do?! It could not POSSIBLY be that the person who should be pointed at might after all reside in the mirror, could it?? Perish the thought!

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