Tuesday, July 15, 2008
According to the media, the economy is doomed to fail. Consumer confidence is at its 16-year low for the fifth consecutive month. Gas is over $4.00/gallon, food prices are rising 5% per year, home values are down 15%, and consumers are strapped for cash. It is a wonder how anyone can survive in this economy. Actually, they do and America’s resilience in spending is impressive.
Yesterday I walked down Boylston Street by the Prudential Center in Boston. I looked across the street and saw a crowd lined up outside the new Apple store; they were waiting in line (some apparently for a while) to buy the new Apple iPhone 3G. Even though the labor market has slashed 438,000 jobs since January, people are still waiting in line to get the newest piece of technology that will be old news in less than a year.
How can the new iPhone 3G be worth a long wait in line? Mike Wendland in Detroit reports many of the 3G’s innovations that make up for the wait. I, however, am happy with my Blackberry that was far less expensive and content not to withstand the 80 degree humid weather in order to say that I own an iPhone. Do people actually miss work (a.k.a., not earn wages) in order to wait in line? I bet yes.
That being said, I remember the piece written by Russ Wiles at the Arizona Republic. He reports that credit card delinquency rates are stable; consumers have not run up debt in order to finance higher food and gas prices. In fact, the delinquency rates of all types of revolving credit in March (first quarter) are just 1%; that means only 1% of consumers with revolving lines of credit are not managing debt payments responsibly.
In previous recessions (grey bars), delinquency rates spiked as consumers used up credit to pay for daily purchases when employment was low and incomes sparse. In the 1980-’82 recessions, when inflation hit double digits (10%-12% in 1981), delinquency rates rose quickly and spiked around 3%. We are just not seeing that spike in this cycle. In fact, delinquency rates are staying in the 1%-range.
The American public is better able to deal with its debt. Prices have been relatively stable (inflation is around 4%), so consumers are better able to plan expenditures and use credit wisely.
The future is not predetermined and there are certainly risks. Prices may start to rise quickly (June’s data is out this week), consumer spending may decline (sales data are out today), and gas prices may hit the $6/gallon mark. The combination of the three would most certainly send the U.S. economy into a 2009 recession. However, the recession has not begun.
People still need and are able to responsibly buy the Apple iPhone 3G.