Personal Finance Advice

While a lack of liquidity in the credit markets are providing a natural break in spending, many Americans are also tightening their belts with the prospects of recession on the horizon.  Consumer spending has slowed considerably over the last few months and it’s having a noticeable effect on the economy.

It is unfortunate that it takes this kind of situation for people to finally start thinking about saving money.  The amount of debt we have in our society is ridiculous.  For many people, their idea of budgeting is the limit on their credit cards.  The government is no better with the national debt at $9 trillion and rising.

It can be difficult to save money in our over commercialized society.  We are being constantly bombarded with marketing spam at every level, when you watch television or surf the web, we even get it from text messages on our cell phones now.

As ridiculous as it sounds, the current economic climate actually seems to encourage more debt.  Rising inflation and low interest rates greatly favors debtors rather than savers.  This can be misleading however, since our economy doesn’t exist in a vacuum.  With the dollar falling to record lows, the relative wealth of our economy compared to the other nations of the world is taking a serious beating.

It is really the savings rate of a society that builds up wealth over time for an economy.  Over the years, our society’s savings rate has dwindled and the accumulation of debt has grown to epic proportions.

As much it would help the economy for us to spend our way out of a recession, is that really the best thing for us as individuals or as a society?  Debt and credit can be powerful tools to help leverage your financial situation, too much of it however can be disastrous.  You need only look to our highly leveraged financial system to see how that is working out now.

Many different factors are beginning to take their toll on the American consumer as they try to cope with the current woes of the economy.  Consumer confidence continues to fall as more and more people grow worried about a recession.

Many retailers are having to downgrade their earnings forecasts for this quarter as consumer spending shows increasing signs of weakening.  High end retailers are faring the worst, as consumers are becoming much more cost conscious at the checkout counter.

The prolonged housing slump is expected to continue for the foreseeable future.  The sharp decline in housing prices has taken a big chunk out of the wealth of what for many is their single biggest asset.  Many who have purchased homes in the last two years now have mortgages that are worth more than the values of those homes.

The subsequent collapse of the sub prime market and the accompanying credit crunch has also had a large effect on consumer spending.  With the troubles of the banking system, individuals and businesses are finding it harder and harder to borrow money.  Credit card issuers are also seeing an increase in late payments and a slowing in spending.

Higher living expenses are also to blame.  The sharp rise in energy and food prices are taking a larger percentage out of disposable income for many middle and lower class Americans.  The weak dollar has also meant a sharp rise in the cost of imports.  While all this is taking place, there has been little to no wage inflation reported as of yet.

The biggest factor to the slowing of spending may be the economy itself.  As economic growth continues to slow, more and more Americans are becoming worried about the future of their jobs.  January saw the economy lose jobs for the first time in years and many are fearful that trend may continue.

Retailers had already reported that sales were slower than expected during the holiday season.  Now credit card companies are saying the same thing,  a slowing in spending and an increase in late payments.

It also seems that high energy prices are finally catching up with the economy.  No matter how much people want to cut back on spending at the gas pumps, they’re daily commute isn’t going to change.

Analysts say that people aren’t using less gasoline, they’re just paying more for it.  So, basically many consumers now have less disposable income for other segments of the economy.

We haven’t even seen how high the price of gas will rise yet.  The price of a barrel of oil rose about 60% last year, an increase that hasn’t fully translated to the pumps yet.  When that happens, you can expect consumer spending to fall even further.

While the price of oil has retreated somewhat after breaking the $100 barrier, inflation concerns still hound the economy.  The price of gold broke the $900 barrier for the first time recently and other commodities are also trading at near record highs.

With reports that the economy was slowing last quarter, this could be a painful double whammy for consumers if the economy does sink into a recession.