Consumer Spending Expected to Slow, But Not by Much

Consumers are expected to spend a bit less next year, as houses begin to look more like houses again and less like automated teller machines.

Many consumers tapped the soaring value of their homes during the recent boom years and used the equity for everything from home improvements to consolidating debt. But as the housing sector slows, spending will driven more by personal income--especially in a strong job market--as well as the healthy stock market.

“Consumer spending growth will bend but it wont break,” said Mark Zandi, chief economist at Moody’s “It will slow in large part because of the fallout from the ongoing housing correction, but it will still be okay. The fact is that outside of housing and manufacturing, the job market remains sturdy. With jobs and income, the consumer will continue to spend.”

Personal consumption expenditures – that includes everything from vacations to toothpaste – is expected to decelerate to 2.7% in 2007 from an expected 3.1% in 2006, according to

“One reason why the housing (industry’s) problems haven’t had a noticeable impact on spending yet is in part because of the sharp decline in gasoline prices, which provided a boost to consumers just when housing was going south,” Zandi added. “Now that gasoline has stabilized, housing problems will become more noticeable.”

Debt at All-Time High

The picture isn't all rosy. Consumer debt is at an all-time high. During the third-quarter, financial obligations comprised about 19.4% of consumers’ disposable income. That’s up from about 17.4% two decades ago, according to the Federal Reserve. But, at least to some, that doesn’t necessarily mean that all Americans have overextended themselves.

“If you look at Federal Reserve data there is no arguing that debt ratios and financial obligations are at the highest levels of anytime in the last 25 years,” says Greg McBride, senior analyst at, a consumer finance website. “The burden continues to grow. Where the debate (centers around) is at what levels (is debt) so high that it becomes problematic. The consumer, to this point, has been sending signals (that) we are not at that point.”

Not all members of the plastic-wielding public have the same impact on consumer spending. About two-thirds of all spending comes from households that make above the nation's median income. Households that earn below the median income--and are struggling with high debt loads and rising mortgage rates--are less of a factor.

Still, the lower-income group “is significant enough that if they grow more cautious in their spending, then overall spending will also slow,” Zandi said. Meanwhile, “high-income consumers are in fantastic financial shape, with high-paying jobs, substantial assets, including fast-appreciating stocks, and little debt. Moreover, if they have any debt it is likely a fixed rate mortgage loan that they've refinanced into a very low rate.”

Mortgage Credit Quality

Mortgage credit quality also bears watching because if it deteriorates more quickly than anticipated, it could spook investors in mortgage-backed securities, which could lead to rising rates and less ample credit, he explained.

For now, it appears that consumers – whose spending drives about 70% of economic growth, are feeling more confident. While it may be too soon to tell whether their optimism has any staying power, the Conference Board's latest Consumer Confidence Index rose to 109, its highest level in eight months. Economists expected a decline to 102.

“Clearly the economy is downshifting but the positive news is that we are beyond full employment, we have everyone working, and earning money,” said Wayne Best, chief economist at Visa USA. “And outside of housing and the auto industry, nearly every other sector is hiring new workers. So that’s very positive for the cycle of the economy” we’re in.

A survey of the Securities Industry and Financial Markets Association’s economic advisory committee expects economic growth to moderate as the housing correction works its way through the economy. The median forecast anticipates that gross domestic product will slow from an estimated 3.3% pace in 2006 to 2.5% in 2007. However, it’s important to note the forecast for next year comes from a wide range of estimates, from 1.6% to 2.9%.

An increasingly disposable society will also keep consumers spending -- to a degree.

“People define their wants and needs different than they did 10 or 20 years ago. That lends itself to stronger spending,” McBride says. “Do you know anyone that doesn’t have cell phone or cable television? The bottom-line (is that) consumer spending is not something that can be turned on or off like a faucet.”