Unconfident consumers

Well, can you blame them?

After two bubble-based expansions, in which first a tech stock bubble (1990s) and then a housing bubble (2000s) helped fuel huge levels of consumer debt, it seems rational for consumers to conclude that they’ve been living beyond their means and hence to retrench.  Today’s report of a 10-point drop in an already-low consumer confidence index is some hard cheese just the same.

The linked story, above, is a good one in that it actually provides information as to what is a “normal” or “good” level of the index.  90 is pretty good, 100 means “strong growth.”  So this month’s reading of 52.9 (again, down 10 points from May’s) is awful.  The best that can be said for it is that it’s double its all-time low of 25.3 in February 2009.

The story also mentions weakness in the housing market, where the Commerce Dept. reported Wednesday that new-home sales in May dropped 33% from their April level.  While a big drop is not shocking in view of the April 30 expiration of big tax credits for homebuyers, it was larger than expected, and the annualized rate of 300,000 new homes purchases is the lowest in the history of the Commerce Dept.’s survey (which began in 1963).  Again, considering the giant bubble in the housing market that preceded the current slump, it seems plausible to me that we have not yet hit bottom, i.e., the market may still have some correcting to do.

I hate to sound like a liquidationist, but if it’s true that the economy was on steroids thanks to a housing bubble and a frenzy of consumer debt, then our “natural” standard of living may be a good bit lower than we’d care to admit.

UPDATE, July 4:  Dean Baker says the housing bubble still has some deflating to do, in particular in California, New York, and Illinois.  He says house prices in those states are still way over trend levels and still abnormally high in relation to rents.

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3 Responses to “Unconfident consumers”

  1. Alex Says:

    I know my personal relationship to the standard of living is a lot lower than it was in 2005 (above average then, below it now). Most of that is directly related to income, but I’m house poor for sure, these days.

    What are your thoughts on the warnings that there’s a similar bubble about to burst in the commercial real estate market?

  2. Ranjit Says:


    You’re back!

    I confess that I know hardly anything about the commercial real estate market, but my impression has been that that bubble has already burst, just less spectacularly as the subprime and other residential mortgage bubbles. Today’s NYT has an informative piece on the subject:


    This recent piece


    sounds the alarms about a bubble to burst in commercial real estate, but its argument seems incomplete. It says it could be a “punch to the gut when commercial real estate mortgages come due over the next three years,” to which I say “Huh?” Do those commercial borrowers currently not have to make any payments? The scenario might be true, but without more information I don’t have enough to go on.

    Also from the article: ‘According to Elizabeth Warren, chair of the Congressional Oversight panel (which monitors the financial bailout), half of all commercial mortgages will be “underwater” by 2011. This means that the borrower owes more on the loan than the property is currently worth.’

    Now that is troublesome (and, for what it’s worth, I am a total Elizabeth Warren groupie). Probably a lot of those mortgages are underwater already, and Prof. Warren seems to think the prices of those properties are going to decline even further. It’s extra troublesome because, unlike most residential homeowners, who continue to make payments on their “underwater” houses (because they want to keep living there, have moral qualms about defaulting, etc.), we’d expect businesses to be more footloose, more inclined to default if it benefits their bottom line. Which could really tank the commercial real estate market. But again, I suspect some of that is happening already, as commercial real estate prices peaked back in 2007/2008.

  3. democommie Says:


    I’m back, too, also. I can still afford beer, but I’ve had to forego paying other bills to do so. I have my priorities.

    I would say that your last comment is spot on as we’ve been hearing for quite some time that real wages have been flat or dropping for years.

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