Last week I had the opportunity to speak with one of the smartest
financial advisors I know, J. Michael Martin of Financial Advantage in
Columbia, Md. Like many observers, he believes we are experiencing a
huge downshift in consumer spending, a reset that could reduce the
consumer's contribution to GDP by as much as 10%.
While that figure sounds somewhat high to me, it's not
outlandish. Consumer spending stood at 60%-61% of GDP in the 1950s,
before steadily climbing to 71% by the middle of the current decade.
As we are discovering all too painfully, this recent level is
unsustainable. Only two decades ago in the 1987 era when savants and
seers were wailing about Americans living beyond their means, consumer
spending was 65%-66% of GDP. If the 10% contraction Mike mentioned to
me seems extreme, a 5% decline in consumer outlays is hardly improbable.
Viewed from another angle, the 5.7% national savings rate the
United States enjoyed in the mid-1990s dissipated to nothing over the
last decade, while household debt soared from 90% of personal
disposable income in 1997 to 133% in 2007. Today, empty restaurants and
shuttered strip malls are sorry reminders of a former lifestyle that
for many Americans was unrealistic.
In casual conversations with friends and anecdotal evidence from
acquaintances, it seems that many ordinary folks aren't finding it so
difficult to reduce their lifestyles and still maintain reasonable
standards of living. During past recessions, the luxury sector has been
immune to spending contractions. This time it's different, and many
high-end luxury good producers have been hit hardest.
Whether or not consumer spending stays down for the count-or the
better part of the next decade-remains to be seen. But if it falls 5%
and stays there for a few years, which certainly is possible, you are
talking about $700 billion a year. Much of that money initially will go
to debt reduction and other forms of "lifestyle restructuring," but a
lot will also go toward savings-and eventually investment. And advisors
aren't going to need to spend hours lecturing clients on the need to
increase their savings.
Watching how this consumer reset plays out will be interesting indeed. Sun Life recently unveiled an Unretirement Index. Fleming Meeks, a perspicacious editor at Barron's, has identified a number of mutual fund, payroll processing and benefit provider stocks poised to benefit from Americans' inability to retire, including ADP, T. Rowe Price, Franklin Resources, Paychex, Hewitt & Associates, and Watson Wyatt Worldwide. Financial advisors are playing in the same ballpark as they are.