January 10, 2003
The Unwinding of a Once Energized Consumer

The Stimulus brothers, Greenspan and Bush, may be able to keep the U.S. economy afloat a little bit longer. However, can any amount of stimuli stop the U.S. economy from soon sinking back into a consumer led recession?

The term ‘pending economic recovery’ has been reiterated so often that it has lost all meaning. To be sure, if three quarters of negative economic activity (1Q01-3Q01) are all that is needed to expel the excesses created during the 1990s - if the United States is truly embarking upon a sustainable expansion - than it is time for common sense to be forever thrown to the wind.

The two simple, interrelated questions that contradict the ‘pending recovery’ theory are as follows:

1) How can the consumer be in ‘recovery’ mode when their debt tolerances expanded dramatically during the recession?
2) How can businesses embrace another upturn before the consumer suffers a single downturn?

If your answer to either of these questions is ‘because interest rates are low!’ or ‘because Bush is on the job!’, chances are you have been infected with the extremely contagious PER virus.

Consumer Credit Trends

Growth in consumer credit has suffered few historical setbacks.  However, when consumer credit does decline it is due to a challenging economic backdrop. For example, during the 1970s and early 1980s consumer credit regularly dropped.

Circling monthly declines in consumer credit, at first, may seem like an inexact method of forecasting future trends. However, that consumer credit is apt to decline during challenging economic times is not so much a working theory, but a matter of historical fact.

During the early 1990s recession, a recession thought to be one of the mildest on record (before the 2001 recession), consumer credit contracted a total of 18 times. By contrast, since February 1998 consumer credit has only dropped once.  Given that the U.S. economy has been weak for some time does this suggest that things are different this time?  Do economic slow downs not need to be met with drops in consumer debt?  Perhaps.  Then again, perhaps the consumer is just beginning to recant their seemingly suicidal desire for acquiring debt?

Consumer Credit Drops In November

Beyond the fact that November is usually the strongest month for consumer credit expansion, what is most surprising about November’s drop in consumer credit is that the Fed cut interest rates on November 6 and from late Oct-Nov the stock markets were in the midst of a terrific bear market rally. With this monetary and psychological stimulus at work, that consumer credit still declined begs an ominous question: is the consumer is finally starting to buckle?

Ominous Trends?

From October 2001-December 2001 personal savings averaged $61.53 billion (SAAR), or less than 1% of total personal income. By contrast, over the last 3 months savings have averaged $346 billion, or nearly 4% of income.  With the average since 1970 being roughly 6.8%, the argument could be made that the recent uptick in savings is nothing more than a reversion to the norm.

Knowing that the U.S. has (had) many troubled industries - airlines, steel, internet, telecom, merchant energy, etc. – the uptick in layoffs and downtick in personal income (chart) is hardly a shock.


Thanks in large part to the tight-rope rally in the stock market – a rally that with each step higher seems to presage an even greater fall -- the possibility of an ‘economic rebound’ appears to be within grasp.  However, when you start believing that such a rebound is sustainable, or that the circles need not be filled in this go round, what you are really doing is accepting the notion that for the first time ever the consumer can exit a recessionary period in worse financial shape than when they went in.

In order for volatile movements in income and layoffs to be smoothed out consumer demand must be steady and/or strong: demand must be strong enough for companies to raise prices before any trickle down impact from increases in profitability meets employees, and demand must be steady enough so that companies stop laying off workers. Suffice it to say, that the consumer has recently developed a tendency to save more money and borrow less (none) suggests that layoffs and income trends are not about to smooth out anytime soon.

In sum, the conclusion is not that the Stimulus brothers are attempting to reenergize the economy, but the realization that they have been trying to do so for two years with only limited success.  To be sure, Bush’s new economic stimulus package replaces the previous package and each Greenspan interest rate cut replaces the old: the PER virus spreads, yet the consumer’s penchant for debt may just be beginning to recoil.


All data and information within these pages is thought to be taken from reliable sources but there is no guarantee as such. All opinions expressed on this site are opinions and should not be regarded as investment advice.
Copyright © 2000, 2001, 2002