One More Reason for Pessimism

Although there are many reasons to be pessimistic about the outlook, that isn't enough for those who are high on the green shoots of permabull delusion. Nonetheless, I suppose there is always the hope that the weight of evidence will eventually bring them to their senses -- thus preventing them from causing even more damage than they already have to others' economic wellbeing.

With that in mind, I offer more proof of why hopes for a recovery are ill-founded in the form of a blog post by Barry Ritholtz, author of the new book, Bailout Nation (a great read, which I was happy to endorse before it hit bookstore shelves), and publisher of The Big Picture blog, entitled "The Still Over-Leveraged Consumer."

One of the primary reasons I am not a big believer in the green shoots thesis is due to the fragile financial condition of the Consumer.

Despite spending less time at the mall, throttling back consumption, and increasing their savings rate, US consumers still finds themselves with too much debt and too little savings. Even worse (at least for the economy), they lack the income or the equity to fund their previous lifestyles.

In my opinion, consumer spending remains an unhealthy ~68% of the economy. While this is down from a peak of ~71%, it is way up from the 63% of the 1950s. The difference over that period has been the massive increase in revolving credit and accessible secure lending (2nd mortgages, HELOCs, etc.).

“Despite recent frugality, consumers have barely dented their debt load. The Federal Reserve will offer a fresh peek at that mountain on Thursday, when it releases its “flow of funds” data for the first quarter.

By the end of 2008, households were on the hook for $13.8 trillion in debt — nearly matching the $14.3 trillion output of the entire U.S. economy, not adjusted for inflation, that year.

Households are shedding debt; they’re just not doing it very quickly. They owed roughly 130% of disposable income at the end of 2008, down only slightly from a record 133% in the first quarter of 2008.”

I am not sure that really puts this into the proper context of indebtedness. Let’s go to David Rosenberg’s recent charts on the same subject:

HOUSEHOLD DEBT-TO-NET WORTH AT AN ALL TIME HIGH

 
Source: Haver Analytics, Gluskin Sheff

HOUSEHOLD DEBT-TO-ASSETS RATIO

 
Source: Haver Analytics, Gluskin Sheff

Other than the scales, these two charts look identical.

The bottom line remains: Two thirds of the economy is dependent upon consumer spending, Oil is now ~$70 a barrel (gasoline coming up on $3), and the consumer’s ability to borrow, tap equity, or otherwise live a profligate, unfunded lifestyle has been radically crimped.

Source:
G19 Consumer Credit
Federal Reserve, June 5, 2009
http://www.federalreserve.gov/releases/g19/Current/
(will be moved here eventually)
http://www.federalreserve.gov/releases/g19/20090605/

On Borrowed Time: Consumer-Led Recovery
Mark Gongloff
Wall Street Journal, June 9, 2009
http://online.wsj.com/article/SB124449816432295655.html

Comments

[roger]

Again & again we hear this silly notion that the consumer
drives the economy. The consumer drives nothing,nada.
Consumers can not consume more than they produce,MATTER OF FACT
they consume less than they produce.
Hell will freeze over before the consumer jumps start the economy

[Rick]

We constantly hear about how consumer spending is 70% of our economy and how we destroyed ourselves shipping almost all of our manufacturing overseas. But according to this article, in the 1950's, the heyday of American manufacturing rebuilding the post-war world, the days we nostalgically yearn for, consumer spending accounted for 63% of GDP. Is that really such a huge difference?

[Martin]

In understand that the savings rate of U.S. consumers is nog at the highest point in 14 years. I think that's very unpatriotic, and I suggest that the U.S. government take drastic action.

[Joe M.]

Bloomberg recently reported that for every 5 unemployed people there is 1 job available. Sound like a lot of permantly out of work people to me and no hope for a revovery.

Joe M

[The Real Deal]

Forget all the theories about consumer spending. Look at reality now: exactly why is the economy crashed?

Foreign invaders? Natural disaster? Terrorist attack? Defective imports mess up people lives? Blow up of a technological society? Depletion of critical resources like water, oil or electric power? Civil war?

None of these of course. It is because of one and only one thing - consumers (and by extension businesses) assumed far too much debt to finance a lifestyle beyond their means. The good times have been spent, the income is still low, but the debt and the accumulating and accelerating interests remain. These wipe people out.

Will a 10% consumer society crash the economy by doing above? No. Will 40%, likely no. Will 70%? Yes.

I said not a word of theory. All pure facts. End of story.

[HSpencer]

Recovery is possible when the American People learn and realize that when you take apples out of a barrel faster than you put them in, the barrel will run out of apples. Consumers are well out of apples. Their barrels are now empty, and the truck with more is no longer on its way.

[Rick P.]

There is a great deal of money sitting on the sidelines right now. After we go through this cyclical correction (currently underway) to take out the excesses of the past 3 1/2 months, this cash will be put to better use in the stock market in the last quarter of the year. Additionally, the spending stimulus will have had more time to affect the economy positively. In the near term(1 to 3 months),investors that aren't afraid to short stocks and/or buy puts in the metals, construction & technology sectors will benefit.
In the last quarter, the sectors that have suffered the most (housing, financials & healthcare) will lead the way to higher values for the DJIA & SPX.