The New Austerity Is For Real

01/08/2009 2:52 pm EST

Focus: MARKETS

Howard Gold

Founder & President, GoldenEgg Investing

Have Americans really ended their free-spending ways?

The holiday shopping season produced dismal retail sales and gargantuan markdowns. Consumer sentiment remains weak as unemployment rises and housing prices continue to drop.

So, it's no surprise that American families have tightened their belts to get through the hard times.

"US household debt, which has been growing steadily since the Federal Reserve began tracking it in 1952, declined for the first time in the third quarter of 2008," The Wall Street Journal reported this week. "In the same quarter, US consumer spending growth declined for the first time in 17 years."

But will Americans just revert to the "shop 'til you drop" mentality as soon as we see the first signs of an economic recovery?

Count me among those who view this as something more lasting-a fundamental shift in mood and psyche, not only here but around the globe. The reason: Consumers have no choice.

"I think we're going to have a permanent change in American consumers and how they behave," says Howard Davidowitz, chairman of Davidowitz & Associates, a national retail consulting and investment banking firm based in New York.

Davidowitz, who has tracked the retail sector for decades and has been bearish on the industry and the markets, says it's simply a question of dollars and cents.

"Americans have spent 6% more than they've earned for the last six years. That is clearly unsustainable," he argues.

That excess consumer spending has been driven by borrowing-especially on credit cards and home equity loans. Household debt, reports economist Gary Shilling, "skyrocketed to 117% [of personal income] in the fourth quarter of 2007."

But credit card issuers are finally raising their standards-they used to issue plastic to anyone who had a pulse-and are cutting credit limits even to the most reliable borrowers.

And the old game of using your home as a piggy bank to finance the lifestyle of the rich and famous no longer works, either. That relied on "cash-out" refinancings-taking out a new mortgage for more than the value of the previous one and banking the additional cash-and, of course, rising home prices.

Has anyone seen a house that's actually risen in value lately? In fact, Americans have lost an estimated  $4 trillion in home equity so far because of the real estate collapse.

That, along with rapidly rising unemployment and the approximately $2 trillion in stock-market losses to retirement accounts, has hit the balance sheets of American households like an asteroid, leaving a huge crater that needs to be repaired.

That's why the savings rate, which has been in negative territory, is rising rapidly, and may hit 10%, by some forecasts. Such a move, Shilling projects, could cut GDP growth by one percentage point a year for the next few years.

He's not the only one who sees a big change-and it's not just happening in the US, either. Consumers in the UK, Ireland, and Spain went on a debt-fueled housing and spending binge that was the equal of ours, and then some. So, they're suffering from the hangover, too.

Andy Bond, chief executive [of ASDA, a British discount supermarket and retailer owned by Wal-Mart Stores,] told the Financial Times "that as in the 1930s, the severity of the downturn would change consumer behavior for a generation."

"'This won't be a recession where it's a blip and then people return to how they were,' he said. 'Anyone waiting for things to get back to normal is mad.'"

The readjustment has been striking, as spending dropped off a cliff in October and November. Auto sales have evaporated, sending chief executives of the Detroit Three crawling to Washington for aid. Even mighty Toyota Motor said it expects to report its first operating loss in 71 years.

And luxury items like jewelry have been rotting on store shelves, as bling is no longer the thing. According to SpendingPulse, luxury goods sales plunged 27.6% in December, a bigger year-over-year drop than November's 24.4%.

Remember the concept of "affordable luxury"? Well, a lot of consumers now think that a $500 Movado watch or $300 Coach purse is not so affordable anymore.

And it's not just here. It's even happening in Japan, where luxury labels have attained quasi-religious status.

Late last year, the Journal reported that luxury-goods giant LVMH Moet Hennessy Louis Vuitton SA has scrubbed plans to put a giant new flagship store in downtown Tokyo.

Japan, which comprises 12% of all global luxury-goods sales, is expected to report those sales declined 7% decline in 2008, according to consulting firm Bain & Company.

The problem? "There are increasing signs that young Japanese women are finally tiring of the luxury brands that previous generations snapped up," the Journal wrote.

"'If it looks good, I don't care what the label is,'" says Izumi Sugano, a 21-year-old shop assistant in central Tokyo. A few years ago in high school, she coveted any bag with a Louis Vuitton monogram. 'Now that I'm working, I realize it's silly to spend so much on a single bag,' says Ms. Sugano."

Closer to home, even high-end Manhattan real estate, which has hovered above the stormy gray clouds that shadowed the rest of the country, has come down to earth with a bang.

The Corcoran Group estimates that overall sales in Manhattan in the fourth quarter were about half of what they were in the same period in 2007, and inventory is up nearly 40%.

Kirk Henckels, the director of private brokerage for Stribling & Associates, told The New York Times that "deal-making at the upper end has all but come to a halt. Sellers are uncertain of the market, and buyers are unwilling to commit to what could be seen as ostentatious purchases."

And if you still don't think this trend will last longer than the next six months, check out this report about teenagers pitching in to help their cash-strapped families.

Here's what Jodi Hamilton, a 17-year-old high school senior from Woodcliff Lakes, NJ, told the Times:

"'I just thought it would be responsible to get a job and have my own money so my parents didn't have to pay for everything.'"

What's this? American teenagers who actually want to help their parents?

As I said before, the times they are a-changin'.

Howard R. Gold is executive editor of MoneyShow.com. The opinions expressed here are his own and are not necessarily the views of InterShow or MoneyShow.com.

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