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Op-Ed: The Great Retail Die-Off


The American consumer is in a state of suspended animation.

Editor's Note: James Quinn is a senior director of strategic planning for a major university. James has held high-level financial positions with a retailer, homebuilder and a university in his 22-year career. Check out more at

Politicians, bureaucrats and financial pundits are breathlessly awaiting the return of irrational exuberance. They believe American consumers just need a little confidence to resume their rightful place at the top of the economic pyramid. I hate to be a wet blanket - but the American consumer isn't coming back. The burden of debt, continuing home price depreciation, lack of savings, and the aging of America will change the face of retailing for decades to come.

In February, the Consumer Confidence Index was 25, the lowest since its inception in 1967. During the dot-com bubble, it reached an irrationally exuberant 140 and hovered at the 110 level until late 2007. The good news: It can't go below zero. But with an unemployment rate of 7.6% and rising, consumers aren't likely to become confident again anytime soon.

The country has tried to spend its way to prosperity over the last 3 decades. Total consumer debt is just under $2.6 trillion, or $23,600 per household, including credit-card debt, auto loans, and personal loans. There are approximately 170 million credit-card holders and 1.5 billion cards - or approximately 9 cards per person. The average household carries nearly $8,700 in credit card debt. The average new car loan is $25,000, with a loan-to-value ratio of 93%. This means the average new car owner is underwater from the moment he pulls out of the dealership.

Only 23% of the credit cards in the country are in the hands of prime borrowers. According to Fitch, write-offs are breaching 8%, and will reach 10%. Auto loan delinquencies are already at 10%. Guess who will step up to the plate and cover these losses? We will.

Consumer credit ranged between 12% and 14% of the GDP from 1965 through 1995. It currently stands at 18%. With the GDP at $14 trillion, the American consumer will have to shed $600 billion of debt to achieve a 14% level. It will take years of debt reduction and GDP growth to rebalance the economy.

US households accumulated an additional $8 trillion in debt over the past decade. As home values rose relentlessly, saving for retirement became passé. Our housing wealth would take care of us in our old age, we thought, and the savings rate went negative.

Average Americans are getting serious about reducing spending and increasing savings. Now, Americans are left with 45% equity in their homes versus 68% in 1985. With home prices destined to fall another 20% to 30%, equity will fall to 35%. One in 7 homeowners across the country has negative equity; of homeowners who bought in the last 5 years, 29.5% are under water.

Between 2002 and 2008, Americans sucked over $3 trillion of equity out of their houses. But that well is now dry: The savings rate jumped to 5% in January, the highest level since 1995. This trend will continue, and could reach 10% in the coming years.
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