The Consumer's Burden

July 28, 2009

Not long ago, house price stability was widely considered the main condition to end the U.S. recession on a sustaining basis.  Today’s drop in equities suggests that stable house prices are no longer a sufficient or even the most important developments that is required.  Today’s Case-Shiller report reflected much more improvement than anticipated.  The composite index for 20 U.S. metropolitan centers posted a monthly increase for the first time since July 2006, a fourth straight decline in on-year house price inflation, and the smallest 12-month drop in nine months.

The drop in U.S. stock prices today is most likely not an instance of buy the forecast, sell the fact.  While a downward correction seemed overdue after the DOW climbed above 9000 from less than 6600 in early March, the technicalities of an over-bought market do not provide an entirely compelling explanation.

Investors are worrying more these days about the recession’s unfinished business.  One of the bigger concerns is the over-burdened U.S. consumer and the continuing vacuum in world aggregate demand caused by weak U.S. household spending.  The labor market is one notable aspect of the U.S. economy that performed worse than expected in both the first and second quarters of 2009.  The 9.5% unemployment rate is 3.9 percentage points greater than a year ago, and employment has plunged 4.1%.  The average duration of joblessness is much longer than in previous business cycles.  In many cases, unemployment insurance benefits are ending before a new job is found.  U.S. growth in coming quarters will not be strong enough to forestall further labor market deterioration, and the onset of meaningful improvement seems unlikely before 2011.

Fear inhibits personal consumption.  Workers spend less if they do not expect a raise, fear job loss, or find national economic trends disturbing.  Tight consumer credit is a further sign of the times and a reminder that maybe it’s time to de-leverage.  A low point in the current situation can be mitigated by strong political leadership that inspires hope and confidence.  That is not happening.  A party that controls both the executive and legislative branches is bogged down, particularly on the key issue of health reform, where the current system penalizes laid-off workers with much higher premiums.  It is a paradox of thrift as families hunker down that what makes sense for individuals creates negative economic energy when practiced by everybody, and family circumstances do not improve.

According to the Conference Board measure reported today, U.S. consumer confidence fell for a second straight month and has reversed 28% of the prior improvement between February and May.  It is telling that U.S. consumers are becoming less confident even as real estate wealth stabilizes, equity wealth rebounds, and analysts predict that economic recovery may be close at hand.  The unsettled mood of households exposes pitfalls in the road back to global economic health.

  • Asia’s rebound has been forged by the stopgap of government fiscal pump-priming.  That region’s long-term strategy remains too reliant on exports-driven growth.
  • Huge questions surround the health of European bank balance sheets, which have weakened sharply.  Unlike the United States, governments in that region have done little to fix the situation.  The U.S. financial system buckled after the Fed raised the Fed funds rate from 1% in mid-2004 to 5% in mid-2006.  What’s going to happen to Europe when the ECB attempts to normalize its policy?
  • Japan suffered severely during the global recession despite relatively healthy banks, reverting to deflation and near-zero interest rates.  Talk of a lost decade, the 1990’s, understates Japan’s regression since 1991.  Data this decade are almost as poor as trends in the last one.  Economic restoration was a mirage, and political leadership is lacking.
  • Labor markets in Japan and the euro area did not deteriorate quite as much over the past year but seem poised for a further down-leg.  Euroland’s unemployment rate in May matched the U.S. 9.5% level in June.   However, the year-earlier level was 7.4%, so the current rate is 2.1 percentage points higher than a year ago.  Japan’s jobless rate climbed just 1.2 percentage points over the past statement year to 5.2%, but the 12-month change in jobs swung from a rise of 0.8% in May 2007 to drops of 0.3% in the year to May 2008 and 2.1% in the year to May 2009.  Japan’s ratio of job offers to seekers has plumbed to a record low of 0.44 from 0.92 a year ago and 1.09 in July 2006.

Unlike the United States, consumer confidence in Asia and Europe has continued to improve.  Japan’s reading was at 37.6 in June compared to 28.9 in May and 26.2 in December.  News today that Italian consumer confidence jumped another 2.1 points in July to a 20-month high foreshadows further recovery in Euroland’s trends.  This dichotomy may not persist.  Without U.S. participation, both the consumer and overall domestic demand performances in other economies would be taxed seriously.  The entire global recovery would be jeopardized if U.S. equity markets and consumer spending fell sharply.  It is important also to understand that recessions do not necessarily evolve smoothly into recoveries.  The worst U.S. post-war recession prior to this one occurred in 1981-2, when the sequence of real growth ran as follows: -3.1% saar in 2Q81, +4.9% in 3Q, -4.9% in 4Q, -6.4% in 1Q82, +2.2% in 2Q, -1.5% in 3Q, +0.4% in 4Q, and +5.0% in 1Q83.  Weak positive growth can be susceptible to stalling, and even a strong positive gain can be distorted by inventory swings.  It is the American consumer’s destiny not to carry the next economic upturn.  This fundamental change in the U.S. business cycle will differentiate the future from the past and attach new responsibilities to other countries.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.

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