Our Changing Globe

Posts Tagged ‘income’

The American consumer cut back so much during the last quarter of 2008, that two recent reports showing that a slight leveling off had occurred in February and March caused many supposed economic pundits to suggest that a bottoming out had occurred and that it was possible to see a light at the end of the tunnel.

The cause for such jubilation?

The Commerce Department announced a rise of 0.2% in consumer spending in February, and the University of Michigan’s index of consumer confidence edged up slightly in March, whilst remaining at near historic lows.

Richard T. Curtin, who has run the University of Michigan survey for decades, said in a just published report, “The good news is that the free fall in confidence has ended. The bad news is that consumers expect their financial situation to remain dismal for the rest of 2009″.

Not only were the increases miniscule, but there were obvious reasons for them. Spending was higher due to higher gasoline prices, and the fact that personal income fell by 0.2% in February got scant attention, even though it most likely means that consumers will have to cut back even further on purchases.

House prices are still falling, the stock market is way down for the year and unemployment continues to rise, but there are a number of economists who believe that consumers who are still delaying the purchase of major items such as a house, a car, or new appliances will soon be forced into buying them, which will in turn create a bounce in the broader economy.

It is totally unclear to me however why the consumer will suddenly feel that he must buy a new car, a new house or a new appliance etc. and I would strongly agree with Howard Davidowitz, who is the chairman of the retail consultancy Davidowitz & Associates who said, “When you’ve got exploding job losses like we have, how would that lead to any improvement in consumer spending? If you don’t have jobs, you cannot possibly have a change in psychology”.

Perhaps ironically, if the consumer’s confidence and appetite do grow, it could well create new problems because the purchasing of big-ticket items in large numbers could create a snap-back in gross domestic product, followed by another recession because of business conditions that are still extremely weak, companies that are still not investing, and weakness in the rest of the world’s economies.

Read the rest of this entry »

Recently released Federal Reserve figures show that household wealth fell by a record $5.1 trillion in the period October to December 2008, which was almost twice as much as the decrease in the previous quarter.

According to the Federal Reserve’s quarterly Flow of Funds report that was released March 12, 2009, the net worth of households and non-profit groups dropped to $51.5 trillion from $56.6 trillion in the third quarter of last year, making it the lowest level for four years.

Household net worth fell in five successive quarters creating a loss of $12.8 trillion during that period, and the decline comes close to equaling the total size of the U.S. economy, which stood at $14.2 trillion in the last three months of 2008.

America’s overall wealth declined by $11.2 trillion in 2008 from the previous year, which is the biggest annual decrease since the government began keeping its quarterly records in 1952.

Total borrowing by consumers, businesses and government agencies rose to an annual rate of 6.3% during last quarter, compared with an 8.1% rise during the prior quarter, and the gain was led by a 37% increase in borrowing by the federal government, and borrowing by state and local governments rose at a 1.2% rate.

The amount borrowed by businesses climbed at an annual pace of 1.7% after having risen 4.1% during the previous quarter.

Additional figures that were just released by the Commerce Department indicate that purchases dropped at a 4.3% annual rate between October and December after falling by 3.8% during the previous three months. The decline, which was led by the biggest drop in consumer spending in three decades caused the U.S. economy to shrink at a 6.2% annual rate during the last quarter of 2008.

Debt dropped at a 2% annual rate, which was the first decrease on record, and mortgage borrowing fell at a 1.6% annual rate following a drop of 2.3% the previous quarter.

Many analysts expect people to hunker down, and to attempt to save more in the coming months which will further restrain spending and economic growth.

Jonathan Basile, who is an economist at Credit Suisse Holdings USA Inc. in New York opined, “I don’t think it’s any surprise that wealth has declined so much, given the bad news out of markets and house prices. This decline in wealth is a headwind for spending and it’s a big reason to be cautious and to save”, and Sal Guatieri, who is a senior economist at BMO Capital Markets in Toronto, said, “Evaporating wealth and forced savings, coupled with rampant job losses, suggest consumers will continue to hibernate”.

President Barack Obama’s administration is attempting to revive an economy that’s in its second year of recession, by way of a $787 billion stimulus package that was signed into law last month, but recent reports indicate however, that consumer spending hasn’t yet begun a sustained recovery, in spite of slightly better than projected results for the first two months of the year.

Read the rest of this entry »