Is Household Debt To Blame For The Employment Collapse? Well…Sort Of

Does Household Debt Contribute to Unemployment?  That’s the argument of Professors Amir Sufi and Atif Mian who claim that weakness in household balance sheets and the associated pullback in spending are directly responsible for 65 percent of the U.S. job losses from 2007 to 2009.

Using county level retail sales data, they attempt to show that the large accumulation of household debt prior to the recession in combination with the decline in house prices has been the primary explanation for the onset, severity, and length of the subsequent consumption collapse. They argue that the decline in consumption was much stronger in high leverage counties with large house price declines and is directly linked to high levels of unemployment in the U.S.

The author’s findings, which they detailed in Bloomberg this week, has generated a lot of discussion (see Calculated Risk) including a posting of the author’s summary presentation at Business Insider.

Here’s where I think they missed the boat.

The "accumulation" of debt was not the trigger or key factor in the slowdown. It was the lack of access to debt that contributed to the consumption collapse.

Easy access to debt kept the economy going from 2002-2006. In 2007, access to debt became more and more restrictive which led to a steady decline in consumer credit card balances.

Card-issuing banks tried to rein in risk amid rising delinquencies and charge-offs and before new legislation and regulations were implemented.

US consumers did not become frugal, they no longer had access to easy debt. Both consumers and small business owners with stellar credit scores felt the sting of reduced credit limits and closed accounts.

Starting this past summer, new credit card account originations began to rise and U.S. consumer revolving credit rose indicating that the sustained pullback in consumer lending has started to ease.

Since personal income in the US remains stagnant, much of the economic growth that we have seen over the past few quarters is probably the result of the increased availability/utilization of consumer credit. While this can fuel a strong third and fourth quarter of 2011, I would expect a slow start to 2012 when credit card statements begin to hit consumer’s mail boxes or email.

Economic Outlook For 2012: Not Rosy, But Optimistic

Despite our dysfunctional government, continuing debt issues in Europe, and a schizophrenic stock market, it doesn’t appear that we will have another recession in the next few quarters. In short, corporate earnings are just too strong for another recession. While unemployment and a weak housing market continues to plague the economy, companies continue cost reducing investments and if we can get some relief for the consumers in the form of lower gas prices and perhaps an extension of the payroll tax cut we should see some consumer strength going into 2012.

Granted, this assumes that our friends in Washington avoid making any substantial mistakes that could damage the economy (a big if) and that we don’t see a run-up in commodity prices (mainly oil and gas).

While there is plenty to worry about and the current economic numbers remain troubling, my outlook going into an election year foresees modest growth and continued improvement in the economy. Typically, we see economic improvement in an election year and without any negative legislation coming out of D.C., I remain cautiously optimistic going into 2011.

Staying Ahead of the Curve (Keeping An Eye On DC)

With all of the talk about an amnesty bill in DC, I don’t’ think it is a coincidence that AARP is expanding its Latino-oriented, Spanish-language media properties. The expansion will will debut with the Spring issue of AARP's quarterly bilingual magazine, AARP VIVA Su Segunda Juventud. The brand will also extend into a TV show, radio series and Web site.

AARP is usually ahead of the curve in DC and is a great example of an organization that keeps an eye on the political tealeaves when looking for opportunities to grow. This is an important lesson for every business. One change in law can have a dramatic impact on your business. Keep an eye on Washington and plan accordingly. It could be the difference between a very good year, or very very bad one.

Glimmer of Consumer Optimism

BIGresearch's March 2010 Consumer Intentions & Actions Survey contains a few kernels of optimism on the economic front. Here are a few highlights:

• In March, fewer than one in three (29.8%) contend they are confident/very confident in chances for a strong economy. While this figure has risen 2+ points from a month ago (27.2%), it continues in the “about 30%” holding pattern begun in May-09. This month’s reading represents an improvement from a year ago (19.5%) as well as Mar-08 (24.8%), but is still well below Mar-07’s 46.9%.
• One in five (20.6%) assert that they worry more about political/national security issues, down nearly a point from last month (21.3%) and three points from Mar-09 (23.8%).
• Consumer confidence showed slight improvement from February, nearly half of those surveyed (48.4%) contend they’ve become more practical in purchasing, up five points from a month ago (43.3%), but still below the 52.7% reading recorded in Mar-09.
• More than half of those surveyed (55.7%) say they are focused on just the necessities when spending, up more than three points from a month ago (52.1%), but lower than Mar-09’s (58.1%).

Cautiously Optimistic: Outlook For 2010

On the heels of Christmas, all eyes turn to the economy and the outlook for 2010. This time of year, organizations big and small look to implementing, or in some cases, completing their business/operational plans and this year’s outlook is significantly brighter than last year.

Last year, I bet that the economy would improve in the 3^rd and 4^th quarter. Fortunately, it did begin to rebound in the 3^rd quarter. There was simply too much money pumped into the system for it not to improve.

So what can we expect from 2010?

Improvement. Despite the recent negative employment news, it definitely looks like the employment market has hit bottom and by February we should start to see signs of an improving labor market. Based on the Fall numbers, auto manufacturers should start to become profitable again, but overall consumer spending will remain weak and choppy. Too much wealth has been destroyed in this recession and it will take some time for real income to rise, which is necessary for strong retail growth.

The dollar remains weak giving strength to exports, local and state government continues to struggle, and commercial real estate continues to tank.

On the plus side, the first half of the year looks positive, especially for stocks. However, inflation or fears of inflation and higher rates becomes the story of the second half of the year.

2010 looks positive. It is 2011 that I’m worried about.

Pocketbook Vs The Medicine Cabinet

During a rough economy, pocketbook issues are always number among voters. According to the latest American Pulse™ Survey, a majority of Americans (55.5%) think the #1 issue that the President and Congress should be focusing their attention on is the economy.  Following not so closely behind is: Healthcare Reform (18.3%), Terrorism (6.4%), Social Security (5.8%) and Afghanistan (5%).

Seemingly, everyone and everything is focused on healthcare and not the economy. Talk about ignoring the needs of your customers/voters.

The study also found that 81.9% of Americans say the U.S. Government is spending too much. Of those who agree, 76.9% say the high level of spending may be sacrificing future economic growth. Over 60% of Americans have negative feelings towards Government spending.

Regarding Government spending, which of the following best describes your feelings?  (Adults 18+)     

Angry, debt is bad	30.7%
Happy, debt is good if it helps people	6.2%
Powerless, no one in Government                   seems to care	37.8%
Empowered, the more Government                does, the better it is for everyone	6.1%
Unsure	19.3

Yes, healthcare reform is important. But not addressing the country’s number one issue and piling up a mountain of debt in the process is irrational and incredibly out of touch. Is it really a wonder that more than one out of three Americans say they feel powerless in regards to government spending? A lot can happen in a year, but I have no doubt that voters will be empowered to punish incumbents in 2010.

A Slow and Steady March Up

The latest Rasmussen Employment Index finds that only 26% of American workers now say their employers are laying people off. That’s the lowest number reporting layoffs since last November.

However last week’s ADP survey suggested that job weakness was still high and the Labor Department’s employment report indicated that more jobs were lost in September than in August.

I think it is safe to say that a V shaped recovery is out of the question. There is just not enough consumer strength or wealth to sustain a quick improvement in consumer expenditures. Until real wages grow faster than inflation, we will not see any major upticks in growth.

A slow, steady, but uneven march upward is the most likely scenario. Think 2% growth for next year. Not strong, but enough to keep us steady.

A Rising Tide For All Boats?

According to the EU, Europe’s economy probably returned to growth in the current quarter after governments spent billions of euros to pull the region out of the worst recession in more than six decades.  Germany and France unexpectedly returned to growth in the second quarter. It also looks like Italy probably emerged from the recession during the third quarter as well.

Economies in Asia and in India are also showing signs of growth despite continued sluggishness in Japan.

Conditions in the US are becoming less terrible. Consumers continue to hunker down, building up a savings cushion and paying down revolving debt.  However, it really looks like July was the bottom that finally ends a recession that started in December of 2007.  

A lot of this recovery is a consequence of the fact that consumption fell so dramatically in 2008 and people finally have to buy things they need in 2009.

Looks like we are finally beginning to see a sustainable but sluggish recovery.

The ABC's Of Recessions

In the past week, we have seen a lot of stories and information contending that the recession ended in July, including a lot of talk about U, V, and W shaped recessions. So what is a V shaped recession?

Recessions are typically defined simply as a period when GDP falls (negative real economic growth) for at least two quarters. Since this is measured by quarterly GDP numbers, many of the recessions are illustrated on graphs and charts. The shape of the GDP curves is used to describe the type and depth of the recession.

V Shaped Recession– sharp downturn followed by sharp recovery (1983)

U Shaped Recession– typical downturn followed by recovery (1991, 2001)

 

W Shaped Recession– short, severe recession followed by weak recovery, leading to another recession (1980, 1982)

 

Current Recession (Long Extended Downturn)

 

I didn’t do graphs for them, but there are two other very important types of recessions

• Sideways L Recession– long downturn followed by recovery (Japan)
• Checkmark Recession- sharp downturn followed by gradual recovery

So what’s going to happen? Real growth is likely during the summer, but some of that will be at the expense of the fall (read Cash for Clunkers). In September, we will see a jump in the employment rate due to seasonal factors that will probably push the number up to the promised 10%.

So, yes conditions are getting better, but a relapse is quite possible and any chance of a V recovery are basically slim and none. My guess? A sideways to checkmark recovery is ahead. Should be an interesting and bumpy Q3 and Q4. When employment outside government and healthcare begins to improve, stronger growth will appear again.

Postive Economic Signs Ahead

Looks like the economic turn has started. Here are a few signs that July may be the turning point.

First, owners of small businesses say they see signs of economic improvement. The Discover Small Business Watch, the card company's monthly survey, found that 30% of small businesses believe the economy is getting better, up from 26% a month earlier.

Second, the “clunker credit” has done more for auto sales than I think anyone expected. Who knew that the program would be this effective at wiping out excess auto inventories?

Third, while we are facing a jobless recovery, it looks like the continuing losses are beginning to ameliorate. More people are being recalled to work and we should start seeing lower new claims for unemployment in the next few weeks.

I’m guessing that we will see positive 3^rd quarter economic growth. The clunker program virtually confirms positive news. It looks like we can mark July or August as the inflection point for recovery.

I do have a feeling that this will be one of the weakest recoveries in history. Employers will squeeze out significant productivity gains (read longer work hours) and try to hold down wages ( read continued losses in personal income) to bolster improved profits. The economy is about to grow, just a slower than we all would like.