American shoppers have a way of rallying when the holidays roll around. But years after the Great Recession, consumers' budgets remain badly squeezed by flat wages, higher payroll taxes and a weak job market.
"It's been a tough year for consumers overall," said Target Chief Financial Officer John Mulligan. "They started the year with the payroll tax increase, and lower and middle-income consumers bore the brunt of that. They were already stressed. The economy has improved slowly over time, but it's been a choppy recovery for sure."
Choppy indeed. With the economy growing at just 2.2 percent since the recession ended in June 2009, there aren't enough good-paying jobs for the millions of Americans out of work or looking for more hours.
Much of the growth in new jobs is in relatively low-wage, low-skilled industries such as retailing and restaurants. Even with the growth in those sectors, there aren't enough jobs to go around—and won't be until overall growth picks up.
"The improvement in the employment and improvement in labor markets has been slower than I'd like to see," said Boston Fed President Eric Rosengren. "We need to see growth much closer to 3 percent than 2 percent if we want to get to full employment in a reasonable time period."
(Read more: US consumer sentiment unexpectedly falls in November)
Though the latest read on GDP showed the economy expanding by 2.8 percent in the third quarter, that isn't likely to cheer up Fed officials much. Too much of the growth came from a build-up in inventories—goods sitting in warehouses and on store shelves that consumers aren't buying.
Final sales rose just 2.0 percent, and overall spending inched up just 1.5 percent, the smallest gain in two years, according to Band of America Merrill Lynch economists Ethan Harris and Joshua Dennerlein.
"In other words, the economy remains stuck in the mud," they wrote in a research note Thursday.
(Read more: Consumers trim spending as DC mess drags on)
American households apparently caught a break in September,based on the latest reports on jobs and income. The government reported that 204,000 new jobs were created in September—and personal income rose by 0.5 percent, after similar gains in August.
But the extra income didn't free up consumers wallets.The data also showed that—adjusted for inflation—consumer spending inched up just 0.1 percent in September after rising 0.2 percent in August.
While housing prices have slowly recovered in many parts of the country, mortgage applications remain sluggish, especially for younger first-time home buyers. That weakness spills over into sales of a number of related categories of goods and services—from new appliances to homeowners insurance.
Other industries feeling profit pressure are tightening payrolls. That includes the health-care sector, which produced a steady stream of new jobs even through the depths of the Great Recession.
The widespread efforts to control
health-care spending are beginning to show up in the jobs data,
according to employment consultant John Challenger.
"The one thing that both parties agree on is that we have to cut costs out of the health-care system," he said. "That usually means when companies do that, there are going to be job cuts. Inevitably were going to be seeing job cuts coming out of that sector for months or maybe years to come."
Consumer spending will remain sluggish as long as job and wage growth does. In the meantime, lower gasoline prices may help, say some analysts.
"It's pretty tough out there," said Jan Kniffen, a retail industry analyst at Worldwide Enterprises. Paying less for gas "puts a lot of money back into discretionary income."
Despite the widespread obsession with oversized numerals posted on top of the pump, those prices make up a relatively small portion of the average household budget: about $3,100 a year for a median
household, with income of roughly $50,000.
Since this year's peak in February, gasoline prices have fallen by about 15 percent, saving that family about $465. That may be enough for a nice TV for Christmas, but it's less than 1 percent of their total household income.
Not everyone is stretched. Luxury retailers are expecting another relatively good holiday shopping season. Brisk sales of high heels and handbags boosted profits for high-end designer Michael Kors by 45 percent in the past year, the company reported Tuesday.
"The one thing that both parties agree on is that we have to cut costs out of the health-care system," he said. "That usually means when companies do that, there are going to be job cuts. Inevitably were going to be seeing job cuts coming out of that sector for months or maybe years to come."
Consumer spending will remain sluggish as long as job and wage growth does. In the meantime, lower gasoline prices may help, say some analysts.
"It's pretty tough out there," said Jan Kniffen, a retail industry analyst at Worldwide Enterprises. Paying less for gas "puts a lot of money back into discretionary income."
Despite the widespread obsession with oversized numerals posted on top of the pump, those prices make up a relatively small portion of the average household budget: about $3,100 a year for a median
household, with income of roughly $50,000.
Since this year's peak in February, gasoline prices have fallen by about 15 percent, saving that family about $465. That may be enough for a nice TV for Christmas, but it's less than 1 percent of their total household income.
Not everyone is stretched. Luxury retailers are expecting another relatively good holiday shopping season. Brisk sales of high heels and handbags boosted profits for high-end designer Michael Kors by 45 percent in the past year, the company reported Tuesday.
It remains to be seen whether the shutdown—and a pair of looming deadlines for a repeat budget battle—gives consumers pause. Some economists believe people's loss of faith in Washington may cripple confidence and prompt shoppers to hunker down for the holidays.
But others argue that the impact of this summer's political spectacle was transitory.
"We're a happy nation, even with Washington doing everything it can to depress us," said Barry Sternlicht, chairman and CEO of Starwood Capital Group. "We have a very short memory. We like the fact our football teams are on the field and Congress hasn't screwed that up. So we're shopping."
UPDATED: This story was updated with Friday's jobs report numbers.
—By CNBC's John Schoen. Follow him on Twitter @johnwschoen.
7 comments:
It seems to me that the lower and middle class are caught in quite a predicament. Improvement in the welfare of these two groups seems bleak with the way our economy has been. As mentioned by the article, “flat wages, higher payroll taxes, and a weak job market” are severely limiting these consumer’s budgets. What business are doing to cut costs is almost counter-intuitive; by freezing wages and firing employees they may have lower production expenses, but the overall economy suffers. If nobody has the income to buy anything except for the wealthy, then how do businesses expect their products to sell beyond a very limited range of output? The middle and lower class represent a large chunk of the demanders in our economy. Without their spending power, industries would lose significant market share and profits would practically disappear. Industries that produce luxury goods might be able to survive, but even they would feel some of the impact if the middle class were eliminated. The increase in payroll taxes is also more harmful than helpful. The article states that the “lower and middle class consumers bore the brunt of it.” A tax should never target these two groups of consumers since their spending patterns are much more fragile. If anything, we need to encourage spending for these groups of people; that way we can facilitate growth in the economy. Tax breaks should be offered instead, in an effort to provide these people with income that would likely be spent and invested into our economy. It would make much more sense to make the wealthy pay these taxes since they would be a lot less responsive with their spending because they have much higher incomes. Also studies have proven that the poor and middle class are much more likely to spend their money with tax reductions while the wealthy are more prone to saving it. Overall, the economy benefits more when the middle and lower class are offered breaks over the wealthy. The economy seems to be caught in a terrible cycle; jobs are needed for income, income is needed to fuel businesses and the economy, and businesses are cutting down jobs and freezing wages for the sake of minimizing costs. This has the effect of reducing income which negatively impacts both consumers and businesses in a continuous downward spiral. The future of our economy doesn't seem to be so prosperous at the moment, but that doesn't mean there isn't a silver lining. Maybe if the government and businesses begin to recognize the importance that the lower and middle class serve in our economy, they will become more protective of them. With such an influential force these two groups serve, we can’t afford to let their purchasing power decline; without them we all would suffer.
-Anthony Riccio
The lower and middle class have bore the brunt of this year's financial issue. Early in the year they experienced payroll tax increase. On top of that, there still are not enough good-paying jobs for the millions of Americans still out of work. Besides low wage jobs, the overall growth of new jobs still is relatively low. The change in that number has been rising slowly during the course of the year. Gas prices have gone down some, saving the average household a few hundred dollars, enough to afford a new TV. The high class of course sits on top living ever so comfortably raking in the cash the buyers plan to give up this holiday season. Overall and besides the facts of a low economic standard, American's will gladly distract themselves from the stress of reality through sports and other various entertainment.
-Mitchell Borrero
It is clear that the lower and middle class have taken a low blow and have been faced with disadvantages that does not help benefit the economy. We are suffering from a weak job market which has had a detrimental impact on the speed of growth of the economy. Due to the fact that we are creating low job markets, such as restaurants and retails we are not increasing our wealth by creating jobs with low output as far as wages and income. We need to create jobs within careers and profession that will have beneficial impact to society and economy.
As our country continues to slowly recover from the recent recession, we are doing very little to create greater numbers of better, high paying jobs. Due to this, the lower and middle classes are struggling financially. Recents issues such as the payroll tax increase and flat wages. With such high gas prices and the pressure as well as expenditures that come along with raising a family its very difficult for middle class and especially lower class citizens to get by. However, I don't expect these conditions to force Americans to bunker for the holidays this year. Theres just something about the holiday season that seems to brainwash people into sprlurging on excessive amounts of gifts. Sometimes going to far and spending money that they don't have leading them into credit card debt. The holiday season is a necessary evil to get Americans to spend their money.
-Michael Scalia
The main idea of this article is that consumer budgets remain conservative due to leveled wages, increased payroll taxes, and an unstable job market. Lower and middle income consumers were greatly affected by increased payroll taxes. There has been slow economic recovery since the Great Recession. There is a shortage of good-paying jobs for millions of Americans seeking employment or additional hours. There have been marginal improvements in income, jobs, and housing prices. Still, the effect is minimal. Industries are restricting payrolls. Somehow, however, luxury retailers are optimistic about the holiday season. To me, it seems that - as usual- the upper class, who are likely feel a bit of constraint themselves, are still far more comfortable than working class Americans who have been caught in the fallout of the Great Recession. This coming holiday season may see a bit of a decline in revenue for retailers, unless consumers are willing to spend more than they conservatively ought to. This decline will entail an inefficient market because demand will be less than supply. Retailers may purchase more to be sold than consumers can even afford to buy.
The main idea of this article is that consumer budgets remain conservative due to leveled wages, increased payroll taxes, and an unstable job market. Lower and middle income consumers were greatly affected by increased payroll taxes. There has been slow economic recovery since the Great Recession. There is a shortage of good-paying jobs for millions of Americans seeking employment or additional hours. There have been marginal improvements in income, jobs, and housing prices. Still, the effect is minimal. Industries are restricting payrolls. Somehow, however, luxury retailers are optimistic about the holiday season. To me, it seems that - as usual- the upper class, who are likely feel a bit of constraint themselves, are still far more comfortable than working class Americans who have been caught in the fallout of the Great Recession. This coming holiday season may see a bit of a decline in revenue for retailers, unless consumers are willing to spend more than they conservatively ought to. This decline will entail an inefficient market because demand will be less than supply. Retailers may purchase more to be sold than consumers can even afford to buy.
-Kaitlyn Szilagyi
this country is very slowly recovering from the great recession. the big problem, and what is slowing our recovery, is that we are not creating new jobs that people can pursue careers in. we are creating more low paying and minimum wage jobs. what we need are jobs that provide enough to support themselves and their families. once that is established, then they can begin contributing back to businesses and stimulating the economy again.because most people cant find jobs like this, they are forced to keep a tight budget, and cant stimulate business around them like they should.
Benny Villani
Post a Comment