Could Europe Strangle Consumer Spending?

Brittney Barrett  |

The holiday season was excellent for consumer spending, with Americans devoting around 5 percent more to gifts year-over-year. The increased activity prompted bullishness surrounding long-term retail stocks and 2012 performance. The stellar 2011 results for retail at either end of the spectrum, and the factors that influenced it are still present, prompting some investors to make early bets on the year’s performance.

Some economists though are cautioning against such actions on the basis that excessive reliance on credit cards has been the primary driver of the spending boom, meaning a reverse will soon occur and deplete consumer confidence. This could have an impact on consumer spending this year, with many buyers looking to purchase more moderately as they manage debt and  delay buying necessities for a time of greater stability.

The average consumer remains unhealthy in 2012, having relied excessively on credit or dipped into savings amid lower salaries, high unemployment and steep gas prices. While its likely that low cost retailers like Dollar Tree (DLTR) and 99 Cent Only (NDN) will continue to thrive through 2012, as a result of their money saving potential, the state of the economy and recent spending could have a deleterious effect on mid-level retailers, consumer electronic makers, restaurants, hotels and airlines.

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The backlash from the fevered spending could be seen as early as the week leading up to Christmas. After a breakout Black Friday weekend and intense shopping in the weeks leading up to the holidays, consumers pulled back, feeling they perhaps already spent too much. The moderate lull in buying may drag down  bottom lines for retailers, forced to offer massive sales in order to continue to entice the consumer in a cash-tight environment.

Recent trends indicate people are willing to spend, but some areas of the market may be excluded. Big ticket purchases like vacations, furniture and home goods have been having a harder time attracting consumers. The pattern explains the meteoric rise of discount travel sites and the willingness of hotels and travel companies to participate in the discounts.

The wealthy have survived relatively well through the recession, with many proving true the old adage of the rich getting richer, but with global pressures, namely slow domestic growth and European volatility, it may be difficult to uphold this. The remainder of Americans are becoming accustomed to receiving discounts, negatively impacting bottom lines. This spending too detracts from the areas where they might otherwise be allocating funds. Vacations will become more local, or skipped entirely, weighing on airlines and hotels forced to offer their services at lower prices.

The reasons behind the lethargy are self evident. Job growth remains weak, and according to the Federal Reserve, will stay that way for the next two years at least. Salaries are flat and the positions opening up are largely in low paying sectors, particularly retail. With  fewer people having jobs and those that do making less money, it makes sense that consumer spending would be weak. Many of these conditions are the same as in 2011, but now the bills are coming in for the years spending and the funds they may have dedicated to the mall will be handed directly to last month’s American Express bill.

Even those Americans who would continue to spend in the face of high credit card bills, may be discouraged by the future of the economy, as a result of European debt contagion. If Europe is unable to purchase goods from either U.S. or China, or is at least making due with less of them, it will suffocate the world’s first and second largest economy, reducing the amount of spare cash available by cutting back on the jobs necessary to run the businesses.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:


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