Popular Economics Weekly

So many are saying that the American consumer has been at least temporarily TKO’ed by a mountain of debt, declining incomes, and loss of both real estate and stock equity. Goodness, it may be months, or even years before he/she regains sufficient health to enter the shopping mall again, say the pundits. No less a former Wall St. economist than David Rosenberg believes that the consumer will be down for years, not quarters.

We believe consumers could be down for several quarters—maybe even a year during this recession—but no longer. The pessimists neglect several factors. First is the effect of the ongoing stimulus spending, which is just now entering the economic pipeline. Economists predict that just the $787 billion in ARRA could boost GDP growth by 1 percent in each of the next 2 years.

Also ignored is the boost to middle class incomes from the various stimulus plans. Household incomes have been losing ground since the 1970s, and the Obama plans are designed to reverse that trend by lowering middle class taxes—for those annual incomes below $250,000. This and other direct efforts to boost demand could give a significant income boost to more than 95 percent of consumers.

And lastly, there is the effect of consumer confidence, or “Animal Spirits”, as Professor Robert Shiller and Nobelist George Akerlof call it in their latest book, “Animal Spirits”. Consumer confidence indexes plunged to post-WWII lows last fall. They have since doubled, but need at least another 50 percent climb to reach pre-recession levels. A further revival of said spirits could bring a tremendous boost to consumer demand, they postulate.

So why all the doubt about the consumers’ health? Much of it has to do with what Paul Krugman has characterized as “zombie” economics—really a political theory of supply-side economics that believed lower taxes and smaller government was good for all. It turned out mostly to benefit the top 1 percent of income earners, while incomes for most Americans continue to stagnate. What ‘trickled-down’ to most consumers was a huge mountain of debt, instead.

In particular, the game stopped for 80 percent of Americans who are wage and salary earners, in other words, when they could no longer borrow to maintain their standard of living. But they are paying back debt with a vengeance. Revolving and installment debt levels have been reduced to 2007 levels, according to the Federal Reserve. And the personal savings rate has risen to 6.2 percent of late.


Further evidence of consumer health is a resurgent real estate sector. The Shiller-Case home price index showed increases in 18 of its 20 metropolitan areas in June. And new-home sales surged 10 percent in July.


There were 7.5 months of new-homes’ supply in July - significantly below the all time record of 12.4 months of supply set in January. Sales in April, May and June were revised higher in the latest report. New-home sales increased 9.1 percent in June to a 395,000 pace, up from 384,000 reported earlier.

The Conference Board’s Confidence index, a survey of 5,000 households, showed improving consumer confidence. Its expectations index rose a full 10 points to 73.5 in August, the highest level since December 2007, the beginning of the recession.

“This is an impressive turnaround,” said Professor Shiller about the latest improvement in home prices. But until foreclosure rates begin to fall, home prices will remained depressed.

Harlan Green © 2009