November 30, 2011
Having failed to funnel stimulus funds into investment, or to encourage business spending, the White House has feverishly embraced “putting more money in the pockets of consumers” as the sole remedy for our too-high unemployment and too-weak recovery. The Obama administration, which continually banks on the beleaguered American consumer to lift our economy (and President Obama’s reelection prospects) from the doldrums, is once again on the wrong track.
Does Black Friday’s stunning 16 percent sales hike prove the White House strategy’s merits? No -- sadly, it will likely prove a false indicator. Though consumers have been de-leveraging, they still have too much debt, just like the government – federal, state and local.
The astonishing fact that nearly one quarter of all turkey-stuffed Americans lined up on Thursday night to get a crack at holiday discounts does not suggest a turn-around in demand; it says that bargain-seeking has become the new great U.S. sport. Our hunter-gatherers may not be stalking elk for the dinner table, but by gosh they are quick to spot a below-market plasma TV. Their weapons are state-of-the art – iPhone apps that make comparison shopping a breeze and give retailers heartburn.
Black Friday’s success was the latest in a string of indicators that Americans are bored with the recession. Who can blame them? We’ve been in a slump for years – notwithstanding the bean counters at the National Bureau of Economic Research who claim the downturn ended in June 2009. Against all odds, shoppers began streaming to malls again in October, pushing retail sales up O.5 percent from September, and 7.3 percent from the year before. The gains were widespread, and especially hefty in the electronics sector, which recorded a jump of 3.7 percent. (Thank you Steve Jobs.)
Certainly, the bulge in retail outlays is good news. Like the New York Giants on any given Sunday, the economy is struggling to maintain forward momentum. Ongoing drags include the shrinkage of state and local governments and still-declining housing sector. Given that the consumer accounts for about two-thirds of GDP, sustained spending is essential.
But sizeable growth from that sector is unlikely, given the meager 2.5 percent pace of income gains so far this year, high unemployment and dismal consumer sentiment readings. Add to the list of woes still-shrinking home prices (described as “disturbingly weak” by researchers at ISI Group), the graying of the population, and an increasing gap between the wealth of old and young reported recently by Pew Research, which means the most likely to spend have the least to spend, and it’s pretty clear that the Black Friday/Cyber Monday excitement could prove a tease.
Though November’s consumer survey revealed an uptick in expectations for the nation’s economy – the third in three months -- sentiment remains at historically low levels. Only one in five consumers saw their finances improving in the year ahead.
Despite their pessimism, consumers spit out savings to fuel the recent spending surge. In October, Americans saved 3.5 percent of income, only slightly higher than the 3.3 percent recorded in September. The latter figure was the lowest since late 2007, before the recession threw the country into panic. In 2009 and 2010 the savings rate – which had dropped to zero at the height of the boom – rebounded to above 5 percent.
Americans seemed to have decided they needed a pick-me-up. “Retail therapy” is especially comforting these days when our government seems clueless, Europeans are pitching the world back into recession, the Chinese are increasingly insufferable and President Obama is casting a cloud of resentment across the land. Unhappily, the numbers say our happiness-shopping may be short-lived.
Though household debt has been dropping from an all-time high of $2.56 trillion in 2008, the decline flatlined in 2010 at about $2.4 trillion, roughly where it stands today. According to a just-released report from the New York Fed, non-real estate indebtedness actually increased in the third quarter. Mortgage debt owed on one to four-family residences peaked at $11.2 trillion in 2007, but remains above $10 trillion.
What do those huge numbers mean? The Federal Reserve calculates a “debt service ratio”, or DSR, which purports to measure how much of income is dedicated to covering interest on mortgage and consumer debt. That ratio peaked in the third quarter of 2007, at 13.96 percent, and drifted down to about 11 percent by the midpoint of this year – in line with levels seen in earlier decades. However, the ratio today reflects record-low interest rates, not below-average borrowings. Debt servicing will put a brake on spending with any bounce in interest rates – almost a given if the economy reignites.
Consequently, the consumer cannot be counted on to gin up growth in the U.S., notwithstanding a good start to the holiday season. (A start which appears to have already lost some steam.) In reviewing its options, the Obama administration has consistently eschewed stimulating the corporate sector in favor of the consumer, resisting the obvious. (Corporations have money, consumers do not.) In this they have been spurred by those on the left like history professor James Livingston, who recently wrote an op-ed for the New York Times in which he declared that “private investment – that is, using business profits to increase productivity and output – doesn’t actually drive economic growth…private investment isn’t even necessary to promote growth.” Instead, he asserts, “we consumers need to save less and spend more in the name of a better future.” Please - don’t let this guy near my children.