In good times and bad, one constant is the American consumer keeps spending.
With the combination of sky-high gas prices and the sagging housing market, consumer's will curb their spending, right? Not exactly. Martin Crutsinger (Associated Press) reported that retail sales are up by the largest amount in more than a year.
So what is to account for this increase in consumer spending? One likely guess is that the recent run up in the stock markets and strong corporate earnings are providing the necessary optimism.
After the dot-com meltdown, investors pulled out huge amounts of capital from the stock market. In order to get more attractive returns, many wealthy individuals poured their money into real estate. With recently-introduced tax breaks and historically low interest-rates for home owners, real estate offered an attractive investment opportunity for those looking to put their money back to work. In retrospect, it makes sense that the housing market boom coincided with the stock market crash. Conversely, now that the housing market has lost its momentum, it makes sense that the stock market is taking off. The US has a huge number of high net worth individuals, and so it is to be expected that different investment sectors will gain and lose popularity at the expense of other sectors.
The net effect of this shift in investments - towards the stock market, private equity, VC and angel investing and away from housing - is the sun is once again shinning on Silicon Valley and Wall Street. The challenge will be to keep the US consumer consuming in spite of the stress of high gas prices and the deflating housing market. If the US consumer does rein in their spending, the current stock market boom could come to a screeching halt. Two of the roughest periods in US history for the economy were the Depression and the inflation-ridden 70's. These two periods of economic gloom were marked by a major pull-back in consumer spending. As many economists remind us, the engine of the US economy is consumer spending. If our historically reliable engine falters, we cannot look to positive economic factors such as cheap gas, falling interest rates, or a rising housing market to bail us out this time. We have an aging population of boomers who are reaching retirement age. Let's hope these boomers choose to enjoy their golden years by going to fancy restaurants, traveling to domestic destinations such as Las Vegas, and upgrading their Camry's for the Mercedes C-class so that we can manage through $4/gas, slowing rising interest rates, and a stagnant real estate market.
With the combination of sky-high gas prices and the sagging housing market, consumer's will curb their spending, right? Not exactly. Martin Crutsinger (Associated Press) reported that retail sales are up by the largest amount in more than a year.
So what is to account for this increase in consumer spending? One likely guess is that the recent run up in the stock markets and strong corporate earnings are providing the necessary optimism.
After the dot-com meltdown, investors pulled out huge amounts of capital from the stock market. In order to get more attractive returns, many wealthy individuals poured their money into real estate. With recently-introduced tax breaks and historically low interest-rates for home owners, real estate offered an attractive investment opportunity for those looking to put their money back to work. In retrospect, it makes sense that the housing market boom coincided with the stock market crash. Conversely, now that the housing market has lost its momentum, it makes sense that the stock market is taking off. The US has a huge number of high net worth individuals, and so it is to be expected that different investment sectors will gain and lose popularity at the expense of other sectors.
The net effect of this shift in investments - towards the stock market, private equity, VC and angel investing and away from housing - is the sun is once again shinning on Silicon Valley and Wall Street. The challenge will be to keep the US consumer consuming in spite of the stress of high gas prices and the deflating housing market. If the US consumer does rein in their spending, the current stock market boom could come to a screeching halt. Two of the roughest periods in US history for the economy were the Depression and the inflation-ridden 70's. These two periods of economic gloom were marked by a major pull-back in consumer spending. As many economists remind us, the engine of the US economy is consumer spending. If our historically reliable engine falters, we cannot look to positive economic factors such as cheap gas, falling interest rates, or a rising housing market to bail us out this time. We have an aging population of boomers who are reaching retirement age. Let's hope these boomers choose to enjoy their golden years by going to fancy restaurants, traveling to domestic destinations such as Las Vegas, and upgrading their Camry's for the Mercedes C-class so that we can manage through $4/gas, slowing rising interest rates, and a stagnant real estate market.
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