Spotlight: October 15, 2001 For those of you yet unaware, the United States economy is almost certainly in recession for the first
time in more than a decade. Furthermore, this recession would have in all probability have come to pass whether the September 11 Attacks on America had occurred or not. Although the terrorist attacks appear to have turned a
bad economic situation worse, the ingredients needed for further economic lethargy were thriving well before September 11. |
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To begin to understand today's consumer it may be prudent to look back at the last recession in 1991. During this recession the consumer actually
contracted borrowings for a total of 18 months (1990-1993). By contrast, total consumer credit has contracted for only 2 months during our current slump. Consumer credit is by no means pre-ordained to drastically drop in the coming months simply because it did so during the last recession. Nevertheless, there are other debt-related statistics which do not bode well for a sustained recovery in the near future. In particular, the household debt service burden is near an all-time high. What this percentage tracks is the total debt load the consumer has versus disposable income. Not surprisingly, this number also dropped precipitously back in the early 1990s. In fact, if the ratio were to contract back to 11.84%, or the 1993 low, this would equate to nearly $200 billion in displaced monies, that is, money spent to pay down debt rather than on consumer items. Given that this amount is more than double the proposed size of the Republican stimulus package, any increase in domestic consumption could be minor indeed. As should be clear by now, recession brings about ominous patterns in consumer spending. As such, this is not
the time for the governing bodies to be diplomatic in their discussions of spending, and debt. Rather, they need to
attack the loss in consumer confidence, and dispel any notions of prolonged economic recession. If the Keynesian
route is the path that this government wants to travel, than it had better do so whole-heartedly. Halfway measures will end up being absorbed in debt repayment rather than stimulating an economic turn-around. As if consumers were not faced with enough challenges, we have the deteriorating corporate environment. Corporate America funded much of its expansion in the 1990s by increasing debt loads. These debt loads were rarely regarded as a negative when stock prices were dramatically rising and the consumer was forever spending. Now that this exciting growth period has calmed, a similar set of challenges to that of the U.S. consumer faces American businesses. Just as the consumer may spend less to shore up their financial positions, so too may businesses continue to cut excesses until demand picks up. Suffice it to say, drops in capacity are not resolved by corporate faith in the future, rather a tangible pick up in demand. As such, it is a forgone conclusion that layoffs will continue to mount, and capital spending will continue to stagnate so long as near term consumer demand is uncertain, and/or falling. In sum, there are only two possible resolutions to the current economic malaise: either the consumer starts spending or the government does. The economy is faced with the beginnings of an economic recession in an environment where the consumer appears unprepared to spend. On the plus side, mortgage refinancing, relatively low unemployment, and tax breaks could alleviate some of the pressure. But the negatives are ever apparent: how do you teach a consumer that is thinking recession to spend beyond their means? Related: Living on borrowed time - US debt bubble set to burst |