Don't Count on the Consumer for a Recovery

The U.S. economy remains mired in a deep recession. How deep, well fourth quarter’ GDP declined 6.3% which was the biggest drop in output in 26 years. GDP figures for the first quarter are not available yet but are expected to be down an equivalent amount. Earnings and profits will also be down substantially in the first quarter after falling 20% in the fourth.

These are horrendous results. There have been encouraging signs in recent weeks and the panic has subsided, but the recession is not over. The economy is still contracting, and though the rate of decline seems to have moderated, there are still problems to overcome. Hope is growing that things will improve even though the banking system is not yet operating normally. In Federal Reserve Chairman Ben Bernanke's words, there are signs of "green shoots," through snow in early spring. The economy is no longer in free fall, but it is still in intensive care and the markets may be getting ahead of themselves.

The outlook for jobs however remains bleak. The unemployment rate is officially 8.5% in the U.S. and 11.2% in California. However, the real national unemployment rate is over 10% when you add in those that have been looking for a full time job for more than a year and those under employed (working part time but seeking full time). One out of every ten adults is unemployed and it will only get worse before it turns around.

Unemployment will continue to move higher as businesses downsize in response to falling sales and constrained credit. We have at least eight more months of rising unemployment before it starts to turn around. The unemployment rate is a lagging indicator because businesses will not begin hiring until the economy is expanding and well into recovery.

The lag is usually significant as the charts of previous recessions show below. These graphs were compiled by JP Morgan Asset Management which allows their charts to be reproduced. The gray bars are recessions and the black lines show the market low. The green line is the total return of the S&P500 which increases from the market lows. It is interesting to look at the orange line representing the unemployment rate because it typically builds higher even after a recession is over and the markets have moved significantly off their lows. In many cases, unemployment remains high for months after a recession is over.

The recovery from this recession will be held back by weak consumer demand. The American consumer will not be rejuvenating the economy by borrowing and spending. In fact the consumer isn’t consuming. He has started saving again and paying off debt. Americans have recognized that they need to have a contingency plan in case they lose their jobs or ever want to retire.

The current argument that the average taxpayer will spend their tax refunds is faulty. Most taxpayers will save their refunds in case their salaries or jobs are cut. After watching their portfolios self destruct and the equity in their homes disappear, the average American is not spending recklessly. For the first time in twenty years the personal savings rate is on the rise. Debt payments as a percentage of disposable income have begun to fall. The American consumer is scared of losing what they have worked so hard to achieve and is finally planning for that rainy day.

Comments

[Larry House:]

You are absolutely right.

Apr 21 10:38 AM

[john the ba...:]

I fear that we are only at the half way point of this Great Recession. I the eye of the storm. Don't be fooled. All that the US econimy has been for about the last 10 years was just a series of bubbles inflated by cheep money (tech, housing, commodities). America needs a fundermental re-thinking of its econimy. When the country finnay emerges out of this in 2012 things look very different.

Apr 21 11:10 AM

[ArkansasAngie:]

Admitted you are known by your associates AND I've never been a good statistical example of anything to date ... but I don't know anybody who hasn't changed their spending behavior.

And I tell you what ... if these yahoos go out and make a bunch of new bad loans today and they subsequently default ... I will be out there with a pitchfork.

Fool me once …

The consumer will not lead us out of this mess. And ... if the FEDury is banking on them doing so we are all in for a world of hurt.

Apr 21 02:21 PM

[Dave Wrixon:]

Frankly, until I see policies that look as though they will attract investment capital to the US, I would not be counting on any kind of recovery. Obama impresses me not.

Apr 21 02:31 PM

[doubleguns:]

Lowered consumer spendeing = lowered corporate earnings. Lowered corporate earnings= lowered employment. (and tax revenues)
Lowered employment,= lowered tax revenues.
Lowered tax revenues,= higher taxes.

It will get worse.

Apr 21 03:56 PM

[User 353732:]

1. The people who are chronically on welfare already spend all they have.
2. The great majority people who have lost their jobs are spending all their unemployment checks and depleting savings. In some cases they are also getting financial or in kind( shelter, food,transportation) help from friends and family but their total capacity( and desire) to spend is less than when they were employed. Moreover, friends and family helping out the unemployed are not motivated to increase their own spending because of what they directly observe.
3. People who have jobs and live paycheck to paycheck cannot spend more. Millions of these people are also in debt and can no longer use home equity credit lines or credit cards to borrow from future income, so their aggregate spending is down, by force. As more of these people see credit cards cancelled or fees soar they will be forced to spend even less.
4. People who have jobs but have seen total income from their jobs decline( eg thru reduced or lost bonuses, commissions, tips) while interest and dividend income has also compressed have less money to spend and are adjusting by at least some curtailments in discretionary spending.Some of these people except to lose their jobs this year and are anxiously reducing expenses in anticipation.
5. People with comfortable incomes and material (albeit reduced)net worth but now well beyond their peak earning years and still facing major expenses(eg college costs for kids or financial help for aging and feeble parents) are scared and reducing discretionary spending and delaying or reducing major capital spending on homes, vehicles, boats etc .
6. This leaves a very small number of people who are either oblivious and totally irresponsible( and will soon be in financial trouble) or have very large , safe, incomes and very high net worth and can , therefore, increase monthly spending by tens of thousands of dollars....but they mostly wont because conspicuous consumption is not presently in fashion or because these people, by nature and habit , have never been big spenders.

Fearful consumers, who lack confidence, curtial rather than increase spending.There is no persuasive evidence that fear is declining( how can it when tens of thousands net jobs are still being lost every week ) or confidence is rebuilding. This suggests that any sustained, self supporting and strong recovery is years away.

Apr 21 05:11 PM

[Spook:]

Lowered consumer spending = lowered corporate earnings.
Lowered corporate earning - lowered operation expenses
Lowered operating expenses = fewer employment.
Less employment = less consumer spending.

Lowered corporate income = less tax to declare
Less tax declare = less tax revenues
Lowered tax revenues = more foreign loans
More loans = more deficits and longer generation to pay

nothing can be worse than this.

Apr 21 05:24 PM

[Moon Kil Woong:]

I like to see the personal savings rate rise back to some level of normalcy. That is about the most positive chart I have seen for a long time. America, don't listen to the borrow hype and keep it up.

Although the economy looks weak, gradually America is getting more healthy even if the banks are doing us a disservice and wasting most of the progress.

Apr 21 11:59 PM

[silentobserver:]

paying back debt = saving

Apr 22 04:00 AM

[notsosmart:]

and who hasnt enough stuff? those that havent lost their homes have more junk than they know what to do with.just how many of each does one need to live comfortably?

Apr 22 12:12 PM