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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 3rd and 4th quarter. Fortunately, it did begin to rebound in the 3rd 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                                               


Happy, debt is good if it helps people                     


Powerless, no one in Government                  
seems to care      


Empowered, the more Government               
does, the better it is for everyone





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 3rd 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.

Fall Is For Football And Growth

Last week’s jobs reports was a shocker to many. We lost more jobs in June than during any month in the previous two recessions. The size of the jobs loss was discouraging and more than anyone thought.

While it appears that we are starting to recover from a near financial collapse, we still have to dig ourselves out of a very deep hole. A lot of household wealth has been destroyed in the past year and most economists are forecasting another 1 to 2 million more job losses, about the size of the last two recessions.

Things are starting to improve and corporate earnings are beginning to improve. But it will be a few more months before we see the signs of good times and significant growth.

Banks Encourage More Bankrupt Companies to Liquidate

More than 100,000 companies—about one in every 270 American businesses—have landed in bankruptcy court since the downturn began 18 months ago, according to data compiled by Oklahoma City-based Jupiter eSources, which tracks bankruptcy filings through its AACER database.

With a 40% annual increase in bankruptcies, some banks are encouraging companies to liquidate their assets rather than launch turnaround plans. Two reasons for the push: Consumer spending is expected to continue to lag, and credit remains tight. BusinessWeek

Life Lesson or Momentary Pause?

Has the turmoil witnessed during this recession really taught consumers a long-lasting fiscal lesson?

According to BIGresearch, a whopping 37.0% of consumers in June admit they haven’t saved any of their income in the past 12 months, while one in five (22.0%) discloses saving more than 10%. At the very least, younger generations appear to be vigilant about feeding their piggy banks...three in five of those 18-24 (58.5%) plan to save “more” than they did last year, compared to just one in four 45-54 year olds (27.6%).

One potential reason for the lack of savings is the decline in consumer debt. Americans are paying off their cards. Credit card debt has actually declined by double digits in the past three months.

Hopeful Signs, Just Not At The Pump Or On Main Street

In case you haven’t notice, energy prices are up. Some of this is the result of a weaker dollar. But a lot of this is the result of an increase in consumption. Gasoline inventories are down and Saudi Arabia’s call for $70 to $75 dollar oil appears to be a target price for years, not just weeks or months.

While the weaker dollar impacts oil prices, it provides a positive outlook for exporters who should benefit from a lower dollar in the coming months.

Housing appears to be close to a bottom and hopefully the worst is over for a beaten industry. Consumers are still very cautious, they are not buying cars and savings continue to rise. Most of the latest surveys indicate that the consumer feels better about the future, but that may not translate into sales until later this fall.

On the downside, ADP reports that businesses with fewer than 500 employees dropped four times as many jobs as larger businesses did last month. With consumer spending down and continued tight credit, small businesses that might otherwise be growing are still having to cut back and cut staff.

It looks like the economy may not be in recovery mode yet, but the recession is definitely moderating. Employment growth will probably lag for most of this year particularly for small businesses. But the consumer should be back soon and that would be welcome news to everyone including those who own businesses on Main Street.

Budget Busting

Americans disagree about a lot these days. However, it appears that they can agree on one item.

Results of the monthly American PulseTM Survey collected online by BIGresearch indicates that an overwhelming majority (75.1%) of Americans say the U.S. Government is spending too much money. Additionally, a majority within each political party feels the same: Democrats (64.1%), Republicans (90.5%) and Independents (79.2%).

On an interesting side note, regardless of the threat of swine flu and influenza, 47.5% of Americans don’t plan on getting a flu shot this year.

Apparently we are scared of budget deficits, but not hamthrax.

Bulls On The Run

For the past week, I have been traveling and beginning work on a new project. During this time, a lot has happened on the economic front. While I believe a stock market correction is in the cards, the bulls are definitely beginning a run and the economy continues to improve. While operating profits are down, apparently investors are relieved that the worst did not happen and the prospects for future operating profits are improving.

Surveys indicate that consumers are increasingly confident in the future but still somewhat pessimistic on current conditions. Yes, personal income and disposable income continues to fall but as confidence improves, consumption will begin to grow.

At the worst, the economy has stopped sliding. For those who see things more positively, the economy is now improving. Either way, we have crossed a threshold and the future is definitely looking a bit brighter these days.

What Marketers Need To Buy Before the Economy Improves

Earlier this month, Forbes put out a list of ten things to buy right now (assuming you have the cash) before the economy improves. Deals can be had for most of these items and the deals will probably evaporate later in the year. Here’s the Forbes list:

  1. Car
  2. A Vacation
  3. High-Dividend Stocks
  4. Laptop
  5. Television
  6. Toys
  7. Diamonds
  8. Women’s Clothing
  9. Furniture
  10. House

From a marketing standpoint, what items should we be focusing on before the economy improves? Granted, all of these items are dependent on the health of your organization and company budgets. If you are in the right position, here are a few things to think about.

First, advertising deals are available. Those with the budget should lock in avails now. New or renegotiated office space should be on the list since prices are depressed and availability is plentiful. Plus, creating a workspace that reflects your brand, your organization and who you want to be when the economy turns is now within reach.

Technology should also be on the list. Typically, tech leads early in most recoveries and the deals will dissipate quickly. Right now deals can be had plus you have the opportunity to get a leg up on the competition by improving your current processes.

Buy the competition. Oracle snapped up Sun, keeping them from IBM. Oracle will be creating efficiencies at Sun while the economy is improving which should be very helpful to their balance sheet. Why not take a look at buying up the competition? If they are not as healthy, this might be the time to talk.

Go see your customers. Travel is cheap. Why not go now when others are avoiding travel and when the prices are reasonable?

Of all of these, the last one is the most important. Go talk with your clients and see where they are headed and see how you can be part of their growth story. Remember, their recovery is your recovery.

Is The Worst Behind Us?

A lot of economic news over the past couple of weeks indicates the worst is probably behind us. Computer orders are up, machinery orders have at least temporally rebounded and it appears that durable goods orders are beginning to improve.

Here’s one overlooked story that indicates things are definitely turning. Operating profits in nonfinancial corporations rose from 7.7 in the spring to 8.7 by the fall. Overall operating profits dropped 10.7%, but the vast majority of the decrease can be attributed to the $184 billion plunge in profits from financial services. While the financial sector has struggled, the remainder of the economy is ahead of the curve in managing their resources.

Most margin rebounds appear after a recession ends. We should all remember that a lot of enterprises are handling this difficult period in a very pro-active way and that the troubles of the financial sector are not representative of the entire economy.

If the troubles in the financial and auto sectors can be somewhat resolved in the next few weeks, the worst should be over. The performance of the stock market over the past couple of weeks is a reflection of this optimism and the growth in the money supply (up an astounding 22% over the past 6 months) will push the economy and the stock market into positive territory.

Spring brings renewal and it definitely appears that the economy is beginning to show signs of new life as well.

Who Won?

Now that the stimulus bill has been passed, it is becoming clear that technology and diversified tech conglomerates are the big winners.

GE will benefit from appliance rebates to water-treatment spending and wind-energy tax breaks. Google and Microsoft will benefit from billions of dollars slated for technology infrastructure. They will also benefit from environmental and educational projects aimed at improving U.S. competitiveness.

Congress set aside $19 billion for health information technology that would digitize health records. Provisions concerning digitizing health information benefits Intel. Intel has been one of the biggest computer-industry players pushing into the health-care arena, promoting new ways to use technology to help homebound patients and automate hospitals and doctors' offices.

The bill also allocates $7 billion to expand broadband access in areas with little or no Internet access, a potential boon for equipment manufacturers along with cable and phone companies.

Wind firms and solar companies such as SunPower won a new grants program designed to provide a direct cash infusion to projects that have lagged because of tight credit markets and a lack of tax credit investors.

The Associated General Contractors estimate that the package provides more than $130 billion in construction spending. Transportation receives the largest share, more than $49 billion, with $27.5 billion of that for highways.

While the bill is generally disappointing for small and independent businesses, it is a boon for energy and technology companies. Anytime government spends this amount of money, there will be winners and losers. In this bill technology, broadband, clean energy technology, construction contractors, and transportation contractors are the big winners. Businesses with exposure in these categories should have a good 2009 and 2010.