False Confidence

Consumer spending drives about two-thirds of total spending in the United States. Such spending has been good for the recent renewal in our economy, as it is after any recession. This is likely why consumer confidence has been on a strong uptrend since December 2004, with the exception of a down month in April 2005. In the past seven months, six have seen a monthly consumer confidence reading of over 100, beating analysts estimates.

 The renewed confidence drives consumer spending, supported by low interest rates. But I’m worried that some of this upbeat attitude may be nothing more than false confidence. While consumer spending needs to stay firm to support the economic renewal in the U.S., there is a trend that has been in place for quite some time that is really beginning to concern me.

 According to a new ACNielsen survey of consumers in 38 global markets, the U.S. was rated as the worst as far as savings

go, with 28% of U.S. respondents saying they “have no spare cash” after paying their essential living expenses. The results were basically unchanged from October 2004 when the U.S. was similarly ranked as the worst saver.

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 But as this downward trend in savings continues, there is increased concern among the spenders over their mounting debt loads. It was one thing when the Fed Funds rate was at a mere 1% last June, but with nine successive 25-basis point hikes by the Federal Reserve and more expected to come, consumers are beginning to notice a rise in the carrying costs of their debt. And therein lies the problem. With debt concerns on the minds of consumers, the U.S. economy may be vulnerable to a potential reduction in consumer spending, thereby impacting economic growth. And this is not good.

 The U.S. may be the richest country in the world based on our gross domestic product, but this appears to be feeding the spending frenzy that could prove disastrous going forward.

 The reality is that the interest rate trend is positive. When this is combined with a positive spending trend, it can spell trouble. Inevitably, should the spending continue, the debt load will become even more of a burden for consumers. Soon all the spenders will have no choice but to ramp down expenditures.

 It may not be good for the economy, but it sure will give debtors some relief. Too bad you just can’t seem to have it both ways in today’s economy.