When it comes to longevity, few royals can top America's King Consumer. For more than four decades, our shopaholic nation has shown an insatiable desire to spend until our credit cards melt. And throughout this era, consumer spending has, well, consumed a greater and greater share of our total economy. Only twice since 1965, despite half a dozen recessions, have Americans spent less in a year than the previous one. Indeed, it often seems that we have defined ourselves by our ability to buy supersized everything, from McMansions to tricked-out SUVs to 60-inch flat-screen televisions—all enabled by decades of cheap credit.
On the surface, it may seem that there's nothing wrong with all that conspicuous consumption, especially for the biggest, most productive economy on the planet. After all, our undying love of stuff has helped fuel a global economic boom. Yet today, America finds itself at a once-or-twice-a-century economic tipping point. A sharp slowdown, record-high gas prices, high consumer debt levels, a plunging real estate market, and the growing green movement all seem to be conspiring to dethrone King Consumer and transform the economy and the American way of life for years to come. "The process of bringing our wants and our needs into realignment," says Merrill Lynch economist David Rosenberg, "is going to involve years of savings and frugality." Or, to put more it more simply, "there is an anti-bling thing going on," says Marian Salzman, chief marketing officer of Porter Novelli.
Party's over. Many consumers, of course, don't have much choice but to scale back. Total credit card debt has increased by over 50 percent since 2000. The average American with a credit file is responsible for $16,635 in debt, excluding mortgages, according to Experian, and the personal savings rate has hovered close to zero for the past several years. High gas and food prices are causing real incomes to fall. Even worse, rising inflation will probably cause the Federal Reserve to start jacking up interest rates once the credit crisis on Wall Street has passed, tightening credit even further. "We're shedding jobs, it's much harder to borrow, and what used to be capital gains are now capital losses," says Scott Hoyt, senior director of consumer economics at Moody's Economy.com. "There's no source of funding for spending." Because many of us won't be able to as easily use our homes as ATMs, Hoyt expects to see an upward trend in saving and slower growth in consumer spending, compared with the binge of the past decade.
It was our appetite for housing, after all, that served as the catalyst for the multidecade consumer boom. Consider this: Consumer spending has risen to just over 70 percent of the U.S. economy from a bit more than 60 percent in 1965. The pace really picked up in the 1970s, when the first baby boomers started buying and furnishing their own homes. But now, Rosenberg says, the median boomer is in his early 50s and looking to unload his fleet of leased SUVs.
To some degree, then, demographics are destiny. Longer term, an aging population will need to spend less and save more for retirement. As that process plays out, consumer spending may become less important in the big economic picture. Moody's Economy.com forecasts that the combination of demographic and financial factors will cause just such a seismic economic shift. Reversing a four-decade ascent, consumer spending could actually start falling as a percentage of U.S. gross domestic product, slipping to 68 percent over the next seven years.
Shopped out. And this new frugality might actually be OK with many of us. Consumers were "so glutted on everything that they had acquired and all the time that was robbed from them...that they almost saw this [downturn] as a great opportunity to stop," says Faith Popcorn, chief executive of her eponymous consultancy. In a recent survey, she found that 90 percent of respondents said they were considering options for "the simpler life," and 84 percent said they were inclined to buy "less stuff."
Another survey found that people rank being in control of their finances and living a green lifestyle higher as signs of success than having money or a luxury car, and view having a paid-off mortgage as more of a status symbol than having a beautiful home. "We have to convince ourselves that the lifestyle we can afford right now is a desirable one," says Holly Heline Jarrell, a global director at the communications firm Manning Selvage & Lee, which sponsored the survey.