It doesn't take a genius to know that American consumers are struggling. It also doesn't take a genius to know that when consumers struggle, so do furniture manufacturers. This year's feeble economic conditions are at least partly to blame. Real GDP actually declined 0.2 percent in the fourth quarter of 2007, grew a meager 0.9 percent in the first quarter and 1.9 percent in the second quarter of 2008. The consumer spending component of GDP (personal consumption expenditures), which represented 70 percent of total GDP in 2007, was considerably weaker in each of these quarters compared to previous years. Consumer spending grew just 1.0 percent in the fourth quarter, 0.9 percent in the first quarter, and 1.5 percent in the second quarter.

Second quarter spending might not have reached even this Spartan level if not for the federal government's $100 billion tax-rebate stimulus package to spur spending. The rebate, which was mailed to consumers from late-April through mid-July, placed up to $600 into individual tax filers' pockets as long as their adjusted gross earnings did not exceed $75,000. Joint filers with adjusted incomes of up to $150,000 received up to $1,200 and filers with dependent children received rebates of $300 per child.

Job market on the decline

Unfortunately, consumer spending has been frail this year despite the tax rebate and a key reason for this lies with conditions in the labor market. Employment began to decline at the start of 2008, and in the first seven months of 2008 the number of payroll jobs dropped by 463,000 the worst declines since 2003. On the bright side, the second quarter decline was a third smaller than the first quarter decline, suggesting that the worst may be over. But the job outlook remains uncertain and further pain may yet be coming: New claims for unemployment benefits reached their highest level in six years during early August.

Housing downturn dampens wealth

Several other factors, of course, have also shaken the foundations upon which consumer spending has been based. The economy has not been the only drain on consumers. In fact, the downturn in the housing market may be even harder on consumers than the slowdown in the economy, and this decline still shows little evidence of a turnaround. The housing downturn has not only meant lower home sales and housing starts, but it has had a severe negative impact on home prices the backbone of consumer wealth.

According to the Case-Schiller home price index, home prices declined 15.8 percent in May compared to a year earlier. This loss in home value has had a particularly negative impact on homeowners, particularly newer homeowners who have not built up considerable equity in their homes. Fortunately, May prices were down just 0.9 percent over the month (the smallest monthly decline since September 2007), so this may be a hopeful sign that declines are slowing. In seven of the 20 cities surveyed by Case-Schiller, home prices actually rose over the month. Cities in the Southeast and Southwest remain depressed, but other areas seem to be modestly improving.

Easy credit has disappeared

Finally, the easy and inexpensive financing available to the consumer, which (until recently) has allowed consumers to spend beyond their means, is another critical factor that has negatively affected consumer spending. Accommodative financing buoyed consumer spending during the early years of this millennium. Unfortunately, the lax regulatory environment led to abuses that resulted in the sub-prime mortgage crisis.

Ultimately, the sub-prime crisis decimated not just financial firms that loan into the sub-prime residential market, but the industry as a whole. Lending has been severely curtailed and those tighter credit conditions are extending to borrowers in the prime as well as sub-prime markets, and are now starting to take a toll on commercial lending. Without that easy access to credit, the mortgage refinancing that supported so much consumer spending during the boom years has now been essentially cut off.

As dismal as conditions currently are, they will eventually improve. It will be a slow recovery, and must occur on several fronts. But as economic conditions stabilize, the housing market will eventually turn around and will improve consumer's financial well-being. As consumers emerge from this situation, most will be in a much better position to move forward in the years ahead. Getting there just won't be an easy ride.

Chart: Monthly change in employment

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