Are Record Retail Sales Good For US consumers?

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Malls will be more crowded in 2011 (Mike Segar/REUTERS)

Congratulations. We are now consuming more each month than we did before the start of the recession.

Collectively, Americans spent nearly $381 billion last month, according to a report on Friday from US Department of Commerce. That was up 0.6% from November, and nearly 8% more than we all spent in December 2009. More importantly, it was the first time since the beginning of the recession that US retail sales hit a new peak, besting a high that was set back in November 2007, just before the downturn started. What’s more, take away the late December Northeast snow storms, and retail sales probably would have been a little higher.

So the American Consumer is back. This is undoubtedly good news for the current economic recovery. IHS Global Insight, for instance, upped it’s GDP number for the fourth quarter slightly. But is it good news for consumers, and long-term health of the American economy, to spending so much so soon after the Great Recession? That’s not as clear. Here’s why:

Over-consumption, particularly of houses, was what got us into the Great Recession. In fact, when we wrote our story of the top 25 people to blame for the financial crisis, the American Consumer was right up there on the list. The recession was when consumers were supposed to kick the consumption habit. The new buzz phrase “the new normal” is all about how we Americans are going to be less reliant on debt, and more thrifty.

The problem is that doesn’t seem to be happening. Yes, consumer debt has fallen during the recession, but much of that has been because of charge-offs by credit card companies, not individuals actually paying down what they owed. For instance, according to a report by Cardhub, when you adjust for banks canceling cards and writing off losses, credit card borrowing actually rose by nearly $6.5 billion. Odysseas Papadimitriou, who runs Cardhub, thinks consumers added as much as another $20 billion to their credit cards in the last three months of 2010 alone.

Right now this is probably sustainable. The recent relatively high savings rate means we can afford to spend a little more. Banks have written off $200 billion in credit card debt in the past year. That’s not good for the credit ratings of the people who had their cards canceled, but it means that they have fewer debts to pay off, and can spend a little more. What’s more, the number of people who are employed is rising again.

But the question is how long is rising debt sustainable. Income has to eventually catch up. Wwages have continued to rise, but at a rate of 1.5%, or just slightly above inflation. And with so many people still out of work and looking to get hired, it is likely that wages will remain relatively depressed for some time. There is even a possibility that for the first time in decades the average American worker might see her paycheck fall. The longer it takes for wages to rise, the wider the gap between income and debt will get. That gap between what we made and what we spent was funded in large part during the mid-2000s by rising housing prices and home equity loans. And that’s no longer going to be possible. “My concern is that people have the false notion that when the economy recovers they will be able to return to the levels of consumption they had before the recession,” says Papadimitriou. “There’s just no way to fund that anymore.”