The Federal Reserve’s most recent statistical review indicated that retail spending growth has been increasing year-over-year, but it appears that the more people spend on minor luxuries, the less they’re saving for a home. Americans have been spending on cars, clothes and electronics, boosting U.S. retail sales for October, the last month for which information is available. For five consecutive months retail sales have been increasing, and many economists, factoring in the record breaking sales on Black Friday and Cyber Monday, anticipate the trend to continue.
Retail has been among the few areas of the economy bolstering domestic growth; playing a large part in the third quarter’s 2.5 percent rate of economic expansion, the fastest pace in over a year. Many of the customers snapping up tablet computers, cosmetics and new clothes though have extra cash for a reason; they aren’t buying a home. The current tenuous economic situation appears to be changing the way people operate. With the potential collapse of the eurozone and analysts doubting a full recovery for the U.S., few Americans are running to the bank to buy a house. Even if they did, loans for homes are more difficult to come by these days, as mortgages require more money up front and better credit.
Ellen Zentner an economist at Nomura told the Wall Street Journal that, “Despite more job gains this year, affordability remaining near record highs, and rising rents generally steering renters to buying, home sales have been unable to break out of a narrow range.”
A new survey by Appraisal Research Counselors Ltd. observed that trend noting that young people between the age 25 and 34 favor the flexibility offered by renting. Many young people have directly experienced how difficult it is to find a job in today’s market and want to be willing to relocate if need be. Others are interested in being able to escape a lease should their current employment turn sour.
“We are riding this sea change in how housing is changing in the U.S.,” said Reggie Brown, chief executive officer of All Property Management LLC to Business Week “The only growth is rentals.”
As young people with jobs continue to rent rather than save for a home, two things are occurring: they are hampering a full economic recovery and spending more money on smaller ticket items. These factors are intimately related. This trend was coined “The Lipstick Index” by Estee Lauder in 2001. She found that sales of lipstick and other cosmetics rose contrary to the direction of the economy. During times of trouble, people are more likely to spend on minor luxuries than make decisions that will have a major impact on their finances or require significant forethought. While lipstick may be an outdated metric, the tendency remains glaringly obvious in the form of nail polish, sales of which increased 59 percent year over year. Rising sales of clothing items at stores from Saks (SKS) to Target (TGT) further exhibit this inclination.
This sort of spending is not negligible when it comes to an economic recovery, the stronger numbers helped to quiet qualms concerning a double dip; but growth would need to be double third quarter levels on a consistent basis to begin to tackle such obstacles as unemployment. An additional concern, as rental rates become more expensive alongside rising demand, is that all the growth born from consumer spending is unsustainable. If jobs remain elusive, and pay rates maintain depressed levels until 2021, consumers may be forced to reduce spending of all kinds in the coming years.