If the mighty consumer is beginning to wane, we could be a long way from an economic recovery. Consumer spending is the key to the economy, representing two-thirds of U.S. Gross Domestic Product (GDP), the broadest measure of economic health.
Encouraged by surging home prices and the lowest interest rates in 40 years, U.S. consumers have been on a borrowing binge to fuel an increase in spending, which has been the economy's main source of support during the economic downturn.
However, U.S. consumers reduced their real expenditures in January by 0.3%. Though not a large number, this could be a sign the burdens of consumer debt and a weak job market are beginning to pressure purchasing decisions. Spending on durable goods fell 5.7%, the biggest drop in 13 years, and wages and salaries in the private sector also fell slightly.
High debt levels, particularly in relation to income, are causing concern for policy makers across the globe. In December, despite continued economic weakness, the Bank of England chose not to lower interest rates, fearing the move would encourage further borrowing and stoke the fires of an already sizzling home market. The thinking was that increasing demand now could lead to a sharper, more unpredictable fall in spending in the future, which is almost certainly a road to recession.
If the economy remains weak, interest rates aren't likely to rise anytime soon; however, if and when rates do begin to rise, the comparable increase in variable-rate debt payments could be the final blow to the consumer pocketbook.
On a brighter note, businesses appear to be gaining confidence and increasing spending. Corporate share repurchases are also on the rise; several large companies, including Altria
With demand for equities remaining weak, the economy and the stock market could be treading water for the foreseeable future, at best. And even if businesses step up to the plate in terms of capital expenditures, replacing a significant drop in consumer spending would be a huge challenge. Being painfully selective in your investment decisions is more important than ever.