The Problem with Confident Consumers

The public may feel better about the economy, but they're still not spending enough.

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People walk past a Forever 21 store in New York's Times Square.

BEVERLY HILLS, Calif. - American consumers are a cheerful bunch, hard to keep down for long. And the whole economy depends on their willingness to spend money.

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The level of consumer confidence often reveals whether consumer spending will be buoyant, since upbeat people are usually more willing to spend money than dour ones. By that measure, the U.S. economy ought to be in pretty good shape. The Conference Board's consumer-confidence index notched a significant improvement in April, for instance, rising to the highest level so far this year. That has happened despite budget battles in Washington that have produced tax hikes, spending cuts and widespread gloom about the country's leadership.

The latest consumer trend, however, may be confidence without spending, which worries business leaders gathered at the annual Milken Institute conference in Los Angeles. "We don't accept confidence at the blackjack table," says Gary Loveman, CEO of Caesar's Entertainment. "You have to have money. And money is a little bit harder to find that confidence."

Like many other businesses, Caesar's has remained profitable even though revenue has been flat for the last several years. "We're busy," says Loveman, "but the [spending] of the guest has come down in every aspect of the resort." Consumers may be confident enough to spend money traveling, while still cutting corners where they can.

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Overall consumer spending has held up better than many economists predicted this year, since tax hikes took a bite out of everybody's paycheck beginning on Jan. 1. But people are saving less too, with the saving rate down to a thin 2.7 percent. That suggests a bigger pullback in spending coming as people rebuild their nest eggs.

The U.S. economy depends heavily on consumer spending, but a healthy economy also requires shoppers who can afford what they buy. And Americans have, in fact, been tightening their finances since the frothy days of the housing bubble in 2005 and 2006. Americans have less debt than they did then, partly because of defaults, but also because of better spending habits. The Federal Reserve has helped by pushing down interest rates and making debt loads more affordable.

But companies need more revenue – more spending by consumers – if they're going to hire more, which is the biggest shortcoming of the tepid recovery. "We need to see the consumers start spending again," says John Calamos, CEO of investing firm Calamos Asset Management. Many firms reporting earnings so far this year have maintained profit margins with little or no revenue growth, which means they remain focused on cutting costs, including labor.

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Businesses would love to see consumers return to more liberal spending habits – whether they save money or not – but that might not be great for the broader economy. "What if consumers really started buying rapidly and ran the savings rate back to zero again?" says Jim McCaughan, CEO of Principal Global Investors. "You'd have another unsustainable boom. I think it's quite reassuring that's not happening. A slow recovery may stand us in better stead than a quick snapback."

Meanwhile, confidence has been inching up, which will probably continue as the housing market recovers and the unemployment rate slowly improves. At some point, gamblers will show up at the blackjack table with both confidence and money.

Rick Newman's latest book is Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman


Corrected on 5/1/13: A previous version of this article misspelled Jim McCaughan's name and identified him as the CEO of Principal Financial Group. He is the CEO of Principal Global Investors.