Can Consumers Overcome The Headwinds?

Generally speaking, Americans love to spend money. For years we even loved to spend money we didn't even have. Rising housing prices, climbing equity prices, and cheap, easy credit made it extremely easy to live right on the edge of your means.

We all know how that worked out. As the economy tumbled, consumers were suddenly under siege. Everything that was previously working in their favor turned around as credit dried up, asset values plummeted toward earth, and unemployment soared. In response, consumers slammed their wallets shut and used any disposable income to pay down existing debt.

The evaporation of consumer demand magnified the impact of the financial crisis. Store inventories quickly built up, factories shuttered, business closed up shop, and expansion plans were put on ice.

However, it was the reversal of this process that started to bring the economy back from the brink. As the worst of the crisis faded, consumers slowly came back to shop. This forced stores to finally order more inventory, allowing factories to start up idle production. The inventory restocking cycle helped reboot the broader economy and create the moderate growth we're currently experiencing.

Since those initial green shoots, consumers have come back in force. Sales of just about everything have moved firmly upward. And though some categories, such as autos, are still nowhere near precrisis highs, the general trend has been quite positive. Consumers have been important drivers of the recovery.

But can they keep it up? I think there are several headwinds that are going to drag on consumer spending in the coming months. Certainly there are tailwinds, as well, and I don't expect demand to drop like it did at the end of 2008. However, things could very well get more challenging going forward.

High Gas Prices/InflationGas might not be a huge portion of most people's budgets. But it has a major impact on consumer perception, and it takes a real dent out of disposable income. As it becomes more and more painful to fill up your tank, higher gas prices can really put a damper on anyone's mood. As consumer sentiment sags, the likelihood of many people wanting to splurge on big-ticket items or small indulgences also sags. And beyond the psychological effect, there is the very real reduction in income that makes it impossible to spend more. To top it all off, the extra money being spent at the pump isn't doing much to stimulate the domestic economy either.

And of course gas isn't the only thing going higher. The prices of food and other everyday essentials have also been rising. As purchasing power erodes, it becomes more difficult for consumers to stay on their feet, especially considering that one area that hasn't seen much inflation is wages, which brings us to"¦

Limited Wage Growth/UnemploymentEmployment has been the glaring soft spot in the economy. The unemployed generally don't spend a lot on anything but the necessities of life. For consumer spending to keep increasing, more people are going to need jobs. Currently unemployed and underemployed workers will need to find jobs in order to start seriously spending again.

Wage growth has also lagged. With so many job seekers out there, it is difficult for existing workers to demand higher wages. The combination of stagnant wages and higher prices doesn't bode well for consumer spending.

Housing/Underwater MortgagesThe wealth effect was our friend when housing prices were going through the roof. As people saw their assets were rising in value, they were willing to save less and spend more of the disposable income. Rising prices also made it very easy to take money out of your house and spend it.

This dynamic has now completely reversed. Home prices are still in the basement in many parts of the country, making households feel poorer. And even if prices have bottomed out, there are no signs that a massive recovery in prices will happen anytime soon. For consumer spending to really take off again, families will need to feel more confident that what is generally their largest asset is stable and growing.

And it is very hard to take money out of a house now.  CoreLogic reports that 23.1% of all homes with mortgages are underwater, and even those whose homes are still worth more than the mortgage amount might find it hard to refinance.

All in all, I wouldn't expect a collapse in consumer spending in the near future, but I think some weakness from current levels or very slow growth is a real possibility.

Do you think the consumer can overcome these obstacles and continue to grow? Have your personal consumption patterns radically changed during the last few years? Are there any other headwinds that have you worried?

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If you can't make the pilgrimage to the 2011 Berkshire Hathaway Shareholders Meeting on April 30, be sure to tune in to Morningstar.com for pre-meeting commentary and on-the-ground coverage in Omaha. We'll bring you on-the-spot article, blog, and video reports featuring commentary from equities strategist and StockInvestor editor Paul Larson, Morningstar Berkshire analysts Greggory Warren and Drew Woodbury, and conference attendees. Click to see more.

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All in all, I wouldn't expect a collapse in consumer spending in the near future, but I think some weakness from current levels or very slow growth is a real possibility.

Do you think the consumer can overcome these obstacles and continue to grow? Have your personal consumption patterns radically changed during the last few years? Are there any other headwinds that have you worried?

Woodstock for Capitalists

If you can't make the pilgrimage to the 2011 Berkshire Hathaway Shareholders Meeting on April 30, be sure to tune in to Morningstar.com for pre-meeting commentary and on-the-ground coverage in Omaha. We'll bring you on-the-spot article, blog, and video reports featuring commentary from equities strategist and StockInvestor editor Paul Larson, Morningstar Berkshire analysts Greggory Warren and Drew Woodbury, and conference attendees. Click to see more.

Be Seen. Be Heard. Become a Morningstar Contributor.Reach a readership of advisors, professionals, and active investors. Submit your commentaries for publication on Morningstar.com.

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