Why is the recovery faltering? There are many explanations: a depressed housing market; weaker-than-expected exports; cautious corporations. But consumers, representing 70 percent of the economy's $14.5 trillion of spending, are the crux of the matter.No job or worried about losing your job? Buck up! Don't put money in the bank for a rainy day. Spend it.
It isn't that Americans aren't behaving as anticipated. They may actually be outperforming. "Consumers are deleveraging (reducing debt) . . . and rebuilding saving faster than expected," writes economist Richard Berner of Morgan Stanley. In 2007, the personal savings rate (the share of after-tax income devoted to saving) was 2 percent. Now it's about 6 percent. Temporarily, this hurts buying. Declines in consumer spending in 2008 and 2009 were the first back-to-back annual drops since the 1930s. Since World War II, annual consumption spending had fallen only twice (1974 and 1980).
Correct me if I am wrong but wasn't our national spending spree the reason we are in this mess now? People bought the government line that everyone deserved to own a home, whether they could afford it or not and whether or not their credit history indicated that they would pay for the home even if they could afford it. As more and more people bought houses the prices went up and riskier loan schemes became necessary to put people in to homes. Once the ball started rolling it didn't stop until it went right off the cliff and it was straight down from there.
When will people feel secure enough to start spending? My parent, children of the Great Depression, were never spenders though they could easily afford to be. It wouldn't surprise me if the young people of today, having watched their parents lose their jobs, then their homes and cars, end up being much more fiscally conservative than the people of my generation. In any case, it is unrealistic to expect people to spend on random goods and services when they are not sure where the next meal is coming from.
Any talk of increased consumer spending is premature when unemployment is sitting at ten percent. First, get the government out of the marketplace and off the backs of employers and the jobs will come. Spending will follow, though hopefully never at the levels that spurred this crisis to begin with.
Cross posted at Pundit & Pundette