The great consumer squeeze of 2005 has begun, and analysts say it will soon get worse.
As energy costs soar, there's more than a whiff of inflation in the air, and Federal Reserve officials are warning of further interest-rate increases.
Bigger energy bills come on top of years of steadily increasing health care costs. And for most people, wage and salary gains have been modest at best.
"The consumer's getting hit by a lot of different things," said Nariman Behravesh, the chief economist of Global Insight, a Massachusetts consulting firm. "Something's got to give, and that something is discretionary spending."
That might spell bad news for the holiday shopping binge, not to mention consumer spending on everything from stereos and restaurants to ski trips.
Let's start at the beginning:
Wages
After inflation, wage growth has been nearly stagnant since Bush took office. Production level hourly wages - which represent about 80% of the US workforce - were $14.27/hour in January 2001 and $16.18 in August 2005 for an increase of 13.38%. Over the same period, the inflation index increase for 175.1 to 196.4 for an increase of 12.16%. This makes the 4½ year wage increase 1.22%.
Health Insurance
Kaiser Health recently issued its annual survey of health care. Here are some of the high points:
Premiums increased an average of 9.2% in 2005, down from the 11.2% average found in 2004. The 2005 increase ended four consecutive years of double-digit increases, but the rate of growth is still more than three times the growth in workers' earnings (2.7%) and two-and-a-half times the rate of inflation (3.5%). Since 2000, premiums have gone up 73%.
The annual premiums for family coverage reached $10,880 in 2005, eclipsing the gross earnings for a full-time minimum-wage worker ($10,712). The average worker paid $2,713 toward premiums for family coverage in 2005 or 26% of the total health premium. While workers' share of their premium has been relatively stable over the past few years, they are now paying on average $1,094 more in premiums for family coverage than they did in 2000.
For those who want the hard numbers, annual premium increases for 2001-2004 were 10.9%, 12.9%, 13.9%, and 11.2%.
Energy
Energy prices are skyrocketing. Jerome wrote an excellent diary on this a few days ago. Of particular importance is the increases are not just in the colder areas of the country but instead all over the US. According to yesterday's USA Today:
U.S. households can expect to pay sharply higher monthly heating bills this winter, with the increases ranging from 45% to 90% in much of the country, utility companies and weather forecasters warn.
Surging energy prices, which have been climbing since spring, come at a time when many households are contending with higher mortgage-finance costs, higher taxes that accompany increased real estate assessments and property-insurance price increases the past two years.
The above article deals solely with heating expenses. It does not deal with transportation expenses, which have nearly doubled this year in some places.
Consumer Debt
Consumers are already indebted at record levels. Households' debt service ratio which are "an estimate of the ratio of debt payments to disposable personal income" hit a record levels in the second quarter of 2005. Moreover, consumers have gone on a debt acquisition strategy for the last 5 years:
Overall, U.S. consumers hold nearly $11 trillion in debt, up from $6.8 trillion in 1999, according to the Federal Reserve. To be sure, households' net worth, bolstered by appreciating home prices, also has risen over the period, to about $49 trillion from $42 trillion.
The US consumer will be hard-pressed to increase his debt level when his wages are stagnant and necessary expenses such as health care and energy rise far faster than inflation.
So where does this lead to? A very questionable holiday season. Heating energy spikes will be in their 2-3 month by the time the holiday shopping season kicks into high gear. Consumers will also be feeling the pinch of higher health insurance premiums and their record debt level. It is possible consumers will hold back on holiday purchases. Considering that 2/3 of the US economy is based on consumer spending and retailers make about half of their profits from the holiday season, the US economy could be in for a world of hurt.
