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Talk about a contradiction in consumer sentiment! Despite the fragility of the economy, the lack of any significant job or income growth, and a blizzard of news stories about offshore outsourcing, consumers are spending as if the late 1990s party was still in full swing.

Over the past two years, job growth has been nearly nonexistent, unemployment has remained uncomfortably high and real income has barely budged. Still, retail sales jumped 7.7 percent from 2001 to 2003, and housing starts and new home sales continue to achieve record levels. In the past, when an uncertain economy combined with headlines about people losing good jobs to foreign countries, frightened consumers would at least hesitate before spending or borrowing for big-ticket items.

Clearly, consumer psychology has changed. Americans just don't scare like they used to when it comes to threats to their steady job. What's more, they have a big appetite for debt, and opportunities for a lot of it. A widely expected rise in interest rates might just drive many highly leveraged consumers to the edge of financial disaster, if not into the tank.

But, even before the latest batch of tax legislation took effect to reduce the hit on most people's take-home pay, continued robust retail and home sales (including lots of second homes) suggested that many people are not so concerned about the risks they take on to curb their spending in any meaningful way. Something else is going on. It just might be that a structural change has occurred in our consumer economy such that household income is not as tightly linked to employment as it used to be.

If it's true that more disposable income from sources other than a day job is available to consumers, that would help to explain how they can go on spending so freely in spite of the shaky job picture.

There are at least three sources of income not related to pay from a conventional job that are contributing much more than in the past to household income: asset sales, investment income and self-employment income, much of which goes unreported and untaxed.

It will come as no surprise to readers that the anti-tax rhetoric out of Washington combined with stories about how little corporations pay in taxes and how the very wealthy shelter their income have made many ordinary citizens feel like chumps if they declare all their earnings. And it's a safe bet that a middle-class citizen making a few thousand bucks on the side believes that the probability of an IRS audit is about the same as the Red Sox winning the World Series.


The Bureau of Labor Statistics estimates that there are about 10 million workers in the U.S. who are self-employed as their primary job and another 1.5 million who are self-employed as a secondary job. Oddly, the BLS does not project any growth in those numbers over the next 10 years even though the changing workforce characteristics strongly suggest that we may see a big increase in the number of self-employed. We checked in with an analyst at the BLS about the bureau's projections, and learned that the government is only tracking reported self-employment trends, which means that unreported unsalaried moonlighting, consultancies etc. expected to increase particularly as Boomers reach and pass retirement age, will all be likely to occur off the government's radar.

Another item about the self-employed that the BLS does not report is how many goods or services (such as a big SUV or pickup truck) are purchased that would be personal in nature for a wage earner are written off as a business expense. Whatever those goods or services cost, they are bought with pretax income.

The number of people with self-employment income is likely to grow quite rapidly in future years for the simple reason that there will be millions more older workers who will have the experience and skills necessary to work for themselves, either part-time or full-time.


A lot of spare cash has been created over the years from garage sales, flea markets and the like, but such person-to-person sales have been raised to a new level by eBay, where people can reach a vastly wider audience who might be interested in the junk in their garage, storage locker or attic. But eBay would not be the big success it is if people didn't have so much stuff, plus the need or desire to turn it into cash.

The aging of the U.S. population means that, compared with 25 years ago, there are now at least 11 million more homeowners ages 50 or older who have, in many cases, spent half a lifetime collecting household goods and other things that they can now more easily turn into cash.

Respondents to the 2002 BLS Consumer Expenditure Survey reported selling over $2.2 billion worth of household furnishings, etc., with householders in the most rapidly growing age cohort (55-to-64) reporting the highest such sales. The bureau does not ask these respondents what they did with the cash, but chances are, they spent all of it in a very timely fashion.


Early in 1991, the Dow Jones industrial average hit 3,000. It is now over 10,000. Not all of that increase in value went to individuals, of course. But the Federal Reserve Bank estimates that in spite of the sharp decline in stock prices from 2000 to 2003, the value of household-owned mutual funds and stocks have more than doubled over the past decade to about $9 trillion.

If just 1 percent of that wealth were used annually to purchase, say, a new primary or second home with an average value of $250,000, that would mean 360,000 housing starts, or about one-fifth of all new dwelling units built last year. Without the influx of money from the more highly valued equities market, the housing market would be substantially less robust than it is.

The bottom line is that the relationship between household income and household spending is becoming more complex. Household spending may not be as dependent on whether the householders have steady jobs or not, as it used to be. Earnings are still important, of course, but we shouldn't be surprised when today's older and, on average, wealthier consumers shrug off gloomy employment news and rising interest rates and go on spending anyway.

Peter Francese is the founder of American Demographics. He can be reached at [email protected].

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