House Poor

Why the source of consumer spending may be tapped out.

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For some time now, analysts have been predicting that the tireless American consumer would stop spending. Could they be right at last? True, consumer spending increased 3.4 percent in 2005, and The Conference Board’s January consumer-confidence survey suggests the trend will continue.

But some signs suggest the tide may turn at last. For one, personal savings as a percentage of income turned negative last year for the first time since 1933. “We can’t go on spending more than we save,” says David Wyss, chief economist at Standard & Poor’s.

Past experience suggests that, given a chance, maybe we could. But not if the source of that spending money — home equity — dries up. Low interest rates and inflated housing values, explains Stephanie Pomboy of MacroMavens, a New York–based consultancy, have encouraged consumers to finance shopping by borrowing against their homes. As the chart on this page shows, the home-equity-loan market is shrinking. As air seeps out of the housing bubble, loan volume will continue to slide.

“Consumers have been hanging in there because of the massive boom in home-equity cash-outs,” says Pomboy. “Now, as the cash-out craze finally slows, we see the reality: wages don’t support consumption.” Indeed, real wage growth has been slowing as companies fight benefits inflation by handing out smaller raises and increasing employee health-care contributions.

Higher capital spending and improved economies overseas may cushion the impact, but that’s little comfort for companies with retail consumers. “Companies like Wal-Mart with lower-end consumers are already having serious problems,” says Pomboy. “A contracting home-equity-loan market will particularly affect the middle-to-high-end consumer.”

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