The good news is that Americans are saving more money. The bad news is that Americans are spending less money. The even worse news is that increasing numbers of Americans without jobs do not have money to save or spend. Huge amounts of federal spending to resuscitate the economy are rarely putting dollars into the pockets of ordinary Americans.
No surprise that sales of lipstick at mass retailers is down 8 percent in the past year, and sales of men's underwear are expected to drop 2.3 percent this year. After all, the economy shrunk 1 percent in the first quarter of this year. Women out of work don't use so much lipstick and men can get along with old underwear. Better news: sales of antidepressants are up. Four million more prescriptions for antidepressants were written for Americans in 2008 than in 2007. In fact, 164 million antidepressant prescriptions were written in 2008, earning manufacturers $9.6 billion in sales. Feeling better are you? For many Americans it feels more like a depression than recession.
In years past, consumer spending accounted for 70 percent of the nation's economic activity, or Gross Domestic Product. With reduced consumer demand for goods and services, businesses need fewer workers and less raw materials and services.
During bubble prosperity, millions of Americans kept the economy spinning and expanding by tapping their credit cards, stock portfolios and rising home values (to borrow even more) and spending in excess of their incomes. They hardly saved money. With depressed home values and much tighter credit that system is gone, probably forever. Even among the many millions that still are rich or very affluent there is either insecurity or embarrassment that is causing less spending and more saving. There is widespread apprehension and downright fear a psychological epidemic about layoffs, the stock market, possible inflation, and real estate prices.
"Not only have people lost money, but they don't expect as much appreciation in the money they have, and that should affect consumption," said Andrew Tilton, an economist at Goldman Sachs. "This is a cultural shift going on. People will save more." In the middle of 2007, Americans saved less than 2 percent of their income, according to the Bureau of Economic Analysis. In recent months, the rate has exceeded 4 percent. And they are getting hardly any interest from banks.
Between 2003 and 2007 - prime years of the housing boom - the net worth of an American household expanded to about $540,000, from about $400,000, according to an analysis of federal data by Moody's Economy.com. We now are in reverse. By the first three months of this year, household net worth had dropped to $421,000. Of course, such averages are next to meaningless because so many households are far below or above such an average figure.
"We're at an inflection point with respect to the American consumer," said Mark Zandi, chief economist at Moody's Economy .com. He correctly forecast a dip in spending heading into the recession, and provided data supporting sustained weakness. "Lower-income households can't borrow, and higher-income households no longer feel wealthy," he added. "There's still a lot of debt out there. It throws a pall over the potential for a strong recovery. The economy is going to struggle."
Guy LeBas, chief economist at Janney Montgomery Scott LLC said "We can't have a sustained recovery without growth in consumer spending."
Unemployment will keep rising and is already at staggering levels in some places, notably rose to 28.9 percent during July, nearly twice the state level. In the rate increased to an estimated 11.9 percent in July, worse than the 9.4 percent national rate. All such official rates actually undercount all the unemployed, because so many have stopped looking for work.
So, here is the big question about which virtually no expert has anything useful to say: How can the US economy rebound and grow, especially enough to pay off the huge national debt, when there is very little possibility of renewed, high consumer spending?
The government cannot keep spending money it does not have, like giving people money to buy new cars, more than half of which were made by foreign automakers. There is not enough of an American manufacturing sector to miraculously start exporting products to compel it to expand and hire lots more people. And the various high tech service sectors face both foreign competition and low demand in other economies. So how do things really get better here?
One possibility is that massive amounts of foreign money get invested in the and even that lots of rich foreigners decide to come and live full or part time here. Another gradual positive change is that millions of rich Americans change their attitudes and decide to start spending more of their income and wealth. Most likely the economy may improve slowly but with a growing fraction of the population sinking into the poverty class. Economic inequality will worsen as the middle class shrinks and a two-class, rich-poor nation becomes the norm.
Wonder how our political system will respond. Will the corporate financed two-party plutocracy retain tyrannical control over politics because lesser-evil voters continue to participate in a wickedly corrupt system?
Thanks Joel for your informative and insightful writing. The American public hears alarm after alarm, but it seems they keep hitting snooze. I hope we wake up. Thanks again.
» left by Graham Harris from France (50 days 14 hours ago.)
Excellent as ever! It goes straight to the point that is encapsulated in the last sentence
"Will the corporate financed two-party plutocracy retain tyrannical control over politics because lesser-evil voters continue to participate in a wickedly corrupt system?
The answer is a plain, and emphatic, NO!
The 'sheeple' continue to react in accordance with the mind conditioning program fed to them daily through all publicity and media channels. Only when they can break out of this pernicious trap and emerge into the sunlight of open-eyed truth will they be free.
It is vital to understand that 'Liberty' - so enshrined in American life - is the antithesis of 'Freedom'.
Keep pressing the points you make so eloquently Joel - One day, One day - the divine intervention may appear!
» left by Dr Clarence Rucker, Jr from MI (48 days 3 hours ago.)
Joel, you could give a good lecture on: "Economic inequality will worsen as the middle class shrinks and a two-class, rich-poor nation becomes the norm." This is a great article. Thanks for the insight.
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