The Shrinking American Consumer 15 comments
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Economic analysis anticipates the future through mathematical equations. If interest rates are reduced by a certain percentage, then the economy can be expected to grow by x factor. The difficulty in accurate prediction arises from the assumptions disguised within the formulas. For the American consumer it is beginning to look like one of those basic assumptions has changed. The consumer that reliably spent most or all of his or her disposable income has become a cautious, price conscious shopper. Value and replacement rather than consumption and excess have become the bywords of the family budget.
If this change in consumer spending habits is permanent then predictions of economic growth based on an assumed level of consumer spending relative to income will overstate potential future GDP expansion. The government may send stimulus checks to the entire population but if the money is not spent the economy will not move.
Retails sales without auto purchases have fallen in seven of the last nine reporting months. Since last August only January and February reported gains. In April they fell again shrinking 0.5%, a much weaker result than expected. The consumer who seemed to have returned in January and February after a terrible fourth quarter was in reality only taking advantage of the large discounts in post-Christmas sales.
The University of Michigan Consumer Sentiment numbers present, on the surface, a different picture. The overall reading has recovered more than 12 points since its November low; the ‘expectations’ result has regained more than 15 points. Both would seem to point to the type of recovery anticipated by economic models with consumers responding to the stimulus provided by low interest rates and government fiscal support of the economy.
However, the ‘current conditions’ reading is far less positive than the headline numbers. It has recovered less from its nadir of last fall and has fallen again since January. In fact, the ‘current conditions’ performance looks a lot like Retail Sales: after transitory gains in January and February the decline has returned.
When people are asked about what they expect for the future, they respond based on the same types of assumptions that underpin economic models. After all, they have been informed over and over again by the financial media that six months to a year after the Federal Reserve cuts rates the economy responds with growth. The stock market is widely regarded as a leading indicator presaging future growth and it has been rising since March. It may seem natural for survey responders to mimic these ideas in their replies.
But when the questions turn to registered facts, to the personal financial and economic condition of the respondent, the picture is far less sanguine. People are less confident about the future than the equities averages might suggest. Their spending decisions as recorded by sales figures are based on these personal pessimistic attitudes and not by the generally accepted notions of incipient economic recovery.
There has been a slow reduction of fear in all the financial markets so perhaps it is not unexpected to find that reflected in improving consumer attitudes. Few analysts expect the extreme volatility of September and October to return. There is plenty of remaining economic concern but it has turned to questions of GDP growth, tax policy and the potential of the US fiscal stimulus package. But diminution of fear should not be mistaken for equanimity about the future. Because consumers no longer expect the imminent collapse of the financial system does not mean the spending assumptions of two years ago will suddenly reassert themselves.
With the need for a haven currency ebbing, currency traders are resurrecting the normal criteria for currency comparison: interest rate cycles and economic growth. Interest rates are currently a dead letter. Even if central bankers were not fighting a worldwide recession, the specter of deflation, receding though it may be, is enough to insure low rates for the foreseeable future.
Most economic actors at any one time operate with a similar set of economic assumptions. The growth potential of the US economy based on the spending habits of the American consumer is the most questionable current assumption. The American consumer is under considerable long term economic stress, any GDP growth assumption that does not recognize this new fact is dubious at best.
A split has developed between what consumers say and what they do. Like the econometric models that assume a level of consumption relative to income that may no longer be valid, so consumers may be anticipating a recovery based on ideas that their own changed behavior has invalidated.
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This article has 15 comments:
After many years when the balance between greed and fear ,in the minds of consumers and retail investors, was in favor of greed a shift has occured in the recent past. At present and for the anticipated future the balance is in favor of fear. Consumers/retail investors are fearful about jobs, retirement income, college education costs, healthcare burdens as they age, the realiability of social security and medicare/medicaid, value of their homes, the need to provide for unemployed/underemployed adult children and frail, aging parents simulataneously.
Fear makes people retreat from consumption and percieved risky investments and risky-high fixed cost lifestylses. Saving money and reducing lifestyle costs/risks have become matters of daily concern for scores of millions of middle class Americans. Their behavior has changed and is changing markedly. We have seen this response to fear in several parts of the world, especially Japan and now in China , Europe and Russia as well.
Until fear is again overwhelmed by greed, consumer/retail investor behavior may be set on its present trajectory. There is little to suggest that, in the next few years, greed will again be ascendant.
Mark nTwain once said-" If a cat sits on a hot stove they wont sit on a hot stove again, but they wont sit on a cold one either because they have over learned from their experience"
The consumer sat on a hot stove in 2000 (tech bubble), 2008 real estate bubble and stock market collapse, they have lost a decade of gains to economic chicanery. To think they will quickly resume their old buying habits is naive and uninformed. They will save and save because they have no faith in the market place, why should they when the Admin is telling us that we cannot survive without big government providing for our every need.
Diligent weeding is better then praying
I can only think the plunge protection team ginned up this nice rally so if we don't get a Goldilocks recover somehow at least the upper tier will have bought some time with our money to leave the Titanic.
Consumerism will no longer drive this economy.
henarl, so that then begs the question... what the h*ll WILL drive this economy going forward?????
The sooner we purge the system of failed institutions and policies, the faster we can begin rebuilding and restructuring. We are squandering precious time and money on a failed system. Unfortunately, our top leaders are captives of this failed mindset/system.
www.ritholtz.com/blog/.../
On May 19 11:49 AM Leftfield wrote:
> Eye of the hurricane. We've spent trillions more, none to directly
> help regular citizens. With real estate and 401's cut in half, job
> losses and aging of baby boomers, spend till you drop is dead.
>
> I can only think the plunge protection team ginned up this nice rally
> so if we don't get a Goldilocks recover somehow at least the upper
> tier will have bought some time with our money to leave the Titanic.
What this economy really needs right now is to find new economies of scale that can be manipulated to the benefit of average Americans so that they can have some money in their pockets to spend. Until we see some major cost-saving innovations in sectors such as energy and health-care this economy will continue to be shaky.
Just last month. the IMF Global Outlook called for no American GDP growth in 2009. This contradicts several blue chip forecasts in the US; nevertheless, from what we KNOW to expect in the dim employment picture, some sunny blue chip forecasts just seem unpersuasive.