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Continued Pressure on the Consumer

We have quickly been led out of many past recessions through the strength of the American Consumer.   Neglecting temporary boosts from government sponsored cash for clunkers programs, I do not believe that is going to be the case this time.  Following the greatest personal wealth destruction since the great depression we have massive required deleveraging of households alongside the onslaught of baby boomer retirement which can only lead to higher personal savings rates.   Walmart just came out with earnings and their EPS slightly beat estimates, but only by slashing inventory 6%.  If people are not buying at Walmart, where are they buying?  Retail sales less Autos came in today at -.6% for July versus a forecast of a .1% increase.  Apparently nowhere.

After decades of declining savings and increasing debt loads, where can we go but up?

After decades of declining savings and increasing debt loads, where can we go but up?

How can 10% unemployment, 100% household debt-to-GDP, and retiring baby boomers with massive underfunding of retirement liabilities lead to anything but an increase in personal savings and slowdown in sales?

The only possible ways to spark consumer demand is to 1) increase consumer lending from banks or 2) decrease unemployment significantly and increase overall income.

The bad news is that banks continue to take it on the chin and only pictures can tell the story:

Credit Card Metrics continue to get worse

Credit Card Metrics continue to get worse

Case Shiller may have suggested that house price declines slowed a few months ago, but it will be interesting to see what happened after may

Case Shiller may have suggested that house price declines slowed a few months ago, but it will be interesting to see what happened after May

Lastly: foreclosures are high now, but judged on the trend in mortgage delinquencies they have further to go

Lastly: foreclosures are high now, but judged on the trend in mortgage delinquencies they have further to go

What this says to me is that the banks are in no condition to lend to the consumer anytime soon and rightfully so.  That leads to the last solution: create jobs and increase income. Our service based free-market economy is in no condition to increase employment in the near future, but our congressmen are more than happy to dump another few $750B stimulus plans into the system to grab a re-election. This will most likely be the medicine that the government tries to give the economy via government produced jobs.  Those who are unemployed can still vote (and have plenty of time to do so), and it is likely that the 2010 election cycle will produce a massive, clamoring political body that will try to garner votes by addressing the unhappy unemployed.

This could actually speed up a recovery, but at the cost of higher taxes and inflation in the future.

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5 Responses

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  1. Danila says

    Great pictures! They really go against everything we hear in the news regarding the state of the economy. And I really hope government jobs aren’t the only thing that can save it, given the inefficiency and bureaucracy of the government.

  2. SurlyTrader says

    I do not believe that the Government will be the only place to supply demand, but the demand from the actual economy will be slow. I believe that the equity markets have a 3% GDP growth rebound in our future whereas I believe actual growth will be slow at 0-1%…that’s a Japan-like economy and not a pretty picture, but manageable. My biggest fear is that the Government will spark another debt fueled cycle which will be even bigger than the last. I would prefer we get rid of the hangover via slow recovery, not by getting drunk again…

  3. Danila says

    If the US follows Japan-line economy for the next decade or two, will stocks be an undesirable investment then, barely keeping up with inflation? What will people use for high return investments for retirement?

  4. Marc says

    What do you think about the New Deal? It’s generally lauded for leading us out of the Depression by the left, but I’ve read recent articles about how this isn’t actually the case. At the very least, could smart planning in goverment works projects improve our infrastructure to grease the skids for future growth?

  5. SurlyTrader says

    We really didn’t get out of the depression until World War II. “The Great Depression” by Murray Rothbard or a newer book “The Forgotten Man” by Amity Shlaes both give a good historical perspective of the events surrounding the great depression. It’s eerily similar to today.

    As for New Deal type initiatives….I’m all for them if the money actually goes to large public works projects such as transportation and IT infrastructure. The problem, as you know, is that every time one of these bills gets passed about half goes to the original intent and the other half goes to a bunch of pork barrel projects.



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