Posted by Davy Bui on July 7th, 2009 in Worth Reading (links to articles, etc.)
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The latest issue of Barron’s carries an informative edition of Michael Santoli’s Streetwise column. Santoli points out that despite the oft-discussed rise in U.S. consumption over the last few decades (now roughly 70% of GDP), most of that increase stems from rising healthcare costs. Ex-healthcare, consumer spending has held roughly flat over the past few decades.

Santoli does not source his comments but taking them at face value, the death of the American consumer takes on a much different complexion. The common stereotype for the American consumer is the spendthrift Mr.  and Mrs. Jones, who withdrew all their home equity to buy Hummers, boats and flat-screen TVs. But Santoli’s column resurrects a point of discussion I first encountered in a book titled The Two-Income Trap.

Authored by Elizabeth Warren (of the TARP oversight commission fame), The Two-Income Trap asserts that the perilous position of the middle and lower classes comes not from wanton consumerism but a decline in living standards. According to her, most people get into financial trouble, not because of too many cars or electronics, but because of stretching to pay core needs like a mortgage in a good neighborhood (for the kids’ schools) and healthcare.

Previously, one income was enough to cover these expenses and if bad times came, the wife could work to help fill the gap for a time. But eventually, a family needed two incomes to support the typical middle-class lifestyle and with the wife already working, no safety net remained to buffer the bad economic times. This drop in living standards has been disguised, first by the introduction of the wife to the work force, and more recently, by increasing debt levels to compensate for stagnant (and now falling) wages.

If this line of thought is borne out by reality, perhaps the “death” of the American consumer doesn’t necessarily equate to the demise of the retailers, auto makers, etc. Of course, the drastic sales drop in autos, jewelers, and other discretionary spending suggests the truth may fall somewhere between Warren’s/Santoli’s assertions and the stereotype.

An interesting debate, to be sure, and one that may have peripheral implications on some investment theses, but this debate may ultimately interest economists and politicians more than investors. Nevertheless, it does suggest caution in overweighting consideration of consumer retrenchment in analyzing an investment. If nothing else, Santoli’s observation implies that healthcare reform is one of the most urgent issues facing the nation. Whether President Obama can deliver on this issue is very much in doubt and another post for another day.