Market DirectionsGDP Growth and the American Consumer
If the ultimate cause of the economic crisis was an excess of credit its cure will almost certainly be a contraction of debt. Banks have already tightened their lending standards, mortgage companies are again requiring 20% down on homes loans, and credit card firms have stopped flooding consumers with unsolicited cards. Banks are not lending because they need to support their balance sheets; consumers have limited their use of credit to repair their own household accounts.
It is consumer spending and borrowing that is the occasion for much of the business of lending. Bank balance sheets can be clean and strong, but if consumers decline to borrow or borrow only at much lower overall amounts it will not matter what condition the financial system is in. If loan demand shrinks then the consumer credit sector will remain moribund and consumer spending will not fuel an economic recovery. It is not only jobs and unemployment that is restraining spending. If the consumer mindset that sought high leverage as part of an expansive lifestyle is lost then no amount of economic stimulus by Washington will bring it back. After all what is the stimulus package about except encouraging consumption? And it was precisely that attitude of unsupportable spending across housing and consumer credit that produced this economic mess. Axiomatic maybe, but if no one had bought sub-prime housing Wall Street and Fannie and Freddie could not have created the financial debacle. If the consumers’ attitude towards consumption has changed then all Washington deficit spending in the world will not recover the economy. Economic shocks, recessions and especially depressions have psychological consequences that endure. My parents lived though the Depression and remembered that time of trouble all their lives. Neither of their fathers were ever out of work, neither of their families lost their homes or bank accounts but their generation’s notions on spending, the stock market, saving, debt and consumption were formed by the Depression. They never trusted the stock market, their only debt was the mortgage on their house which they saved to pay off early and they shunned almost all kinds of self pleasing spending indulgences. Will this recession produce such a change in consumer outlook? The answer probably depends on how long it lasts. One of the salient facts of the Depression was its length. For a full decade, from 1930 to 1940, unemployment in the US never dropped below 14%, for much of the time is was considerably higher. The enduring difficulty of that decade burned itself into the psyche of a generation. Personal checks from Washington do not produce consumption. At best the government can replace some jobs lost from the private sector and create a temporary boost to GDP. Citizens spend freely because they have confidence in the future and in their future income. So many institutions have been damaged or found to be faulty in this crisis that confidence in the US economic system itself has likely been damaged. Government also, the lender of last resort, is operating only as a stopgap. Wary unconfident consumers are not about to open their wallets and plunge in a new SUV. How much will the events of the past two years alter consumer attitudes? Are the empty malls and restaurants tied only to current conditions or a permanent change? Is the level of overall American of consumer goods headed down? It is difficult to predict a return to free spending ways of the past decade but the longer the recession lasts the more pronounced will be the change in consumer habits. It is likely that anyone who has gotten burned in this economic collapse will not easily return to their prior spending habits. Since that is almost everyone the change in long term GDP growth rates may ultimately be profound. |