Indeed

Shift From Spending to Saving May Be Slump’s Lasting Impact

A glimmer of hope?

I think this week's leader in The Economist pretty much nails things: A glimmer of hope?

Selected excerpts, emphases mine:

Beginning with the subhead, after that sort-of-optimistic headline:

The worst thing for the world economy would be to assume the worst is over

..... two other slumps are likely to poison the economy for much longer. The most important is the banking crisis and the purge of debt in the bubble economies, especially America and Britain. Demand has plummeted as tighter credit and sinking asset prices have exposed consumers’ excessive borrowing and scared them into saving more. History suggests that such balance-sheet recessions are long and that the recoveries which eventually follow them are feeble.
The second slump is in the emerging world, where many economies have been hit by the sudden fall in private cross-border capital flows. Emerging economies, which imported capital worth 5% of their GDP in 2007, now face a world where cautious investors keep their money at home. According to the IMF, banks, firms and governments in the emerging world have some $1.8 trillion-worth of borrowing to roll over this year, much of that in central and eastern Europe. Even if emerging markets escape a full-blown debt crisis, investors’ confidence is unlikely to recover for years.

Here in America:

Consumer spending and firms’ investment will be dragged lower by the need to pay back debt and restore savings. This will be a long slog. Private-sector leverage, which rose by 70% of GDP between 2000 and 2008, has barely begun to unwind. At 4%, the household savings rate has jumped sharply from its low of near zero, but it is still far below its post-war average of 7%. Higher unemployment and rising bankruptcies could easily cause a vicious new downward lurch.

After reviewing the ugly situation in Japan, Germany, the UK etc, the summary begins:

....Add all this up and the case for optimism fades quickly. The worst is over only in the narrowest sense that the pace of global decline has peaked. Thanks to massive—and unsustainable—fiscal and monetary transfusions, output will eventually stabilise. But in many ways, darker days lie ahead. Despite the scale of the slump, no conventional recovery is in sight. Growth, when it comes, will be too feeble to stop unemployment rising and idle capacity swelling. And for years most of the world’s economies will depend on their governments.

......Welcome to an era of diminished expectations and continuing dangers; a world where policymakers must steer between the imminent threat of deflation while countering investors’ (reasonable) fears that swelling public debts and massive monetary easing could eventually lead to high inflation; an uncharted world where government borrowing reaches a scale not seen since the second world war, when capital controls ensured that savings stayed at home.

I much agree - especially the bit about a world of diminished expectations, led by a shrinking US consumer sector, and an era of great uncertainty

Summers and the 'inventory cycle'

He was just on CNBC making a pretty big deal about the inventory cycle being one of the keys to economic recovery in the coming months. The theory being that inventories are declining and consumption bottoming, so eventually businesses will need to crank up production to meet consumer demand. This is all pretty standard thinking

But I wonder if he's really willing to admit (or, more disturbingly, foresee) the very real possibility that US consumption will never again return to pre-recession norms.

Looking at the usual suspects like inventory cycles to predict future economic events assumes that nothing will have really changed once the worst of this is (seemingly) behind us. Couldn't be further from the truth, imho

As has been mentioned here before:

1. Consumers will have dramatically reduced access to credit. They will not be able to borrow.
2. Consumers have lost $12Trillion in net worth, and counting. They desire to save, and we'll get back to an 8-10% national savings rate, probably pretty fast.
3. Newer, younger consumers will not behave like Boomers. They seek sustainable consumption
4. Older consumers are freaked about retirement. They will invest and spend extremely cautiously
5. Health care and education aren't getting any cheaper anytime soon....
6. Everyone will suffer from double-digit unemployment well into 2011, and the fear thereof looms large. They will look for security, not consumption.

This is not your garden variety recession folks, and garden variety analyses of 'recovery' are not operational.

Summers' boss got it at the G-20: Obama: The American "voracious consumer market" has ended But it seems I was wrong about Larry being the catalyst.

That 'resiliant consumer'. Not!

US Retail Sales Show New Weakness
Wall Street Journal - ‎56 minutes ago‎
By JEFF BATER, WASHINGTON -- US retail sales unexpectedly plunged during March in a broad-based decrease that threw a shadow over recent signs of improvement ...

When oh when will news of this sort no longer be 'unexpected'?

Worse than expected, disappointing, etc, etc...

But instead of extending hopes of consumer confidence, Tuesday's retail sales data seemed a setback. Housing-sector sales dropped sharply in March, with furniture retailers down 1.7% and building material and garden supplies dealers sliding 0.6%.

Another sector that has weighted down the economy is cars. Year over year, auto and parts retail sales have fallen 23.5% since March 2008. March 2009 sales fell 2.3% compared to the prior month. Excluding autos, all other sales dropped 0.9% -- bigger than the 0.1% dip expected by economists

When savings return to 1980's levels, where's spending coming from, pray tell?

And savings will inevitably grow to 10%. Folks are broke, tired of the rigged game on Wall St, sick of spending 5x too much on stuff at Neimans, and are fully well-aware that cash matters...

Retail sales - the new norm

See this from the Times:

U.S. Retail Chains Report Another Sales Drop in March
By STEPHANIE ROSENBLOOM 1:09 PM ET
March’s sales were worse than February’s, but the rate of decline seen during the holidays has slowed.

Wall St interprets this as signs of a bottoming (decelerating decline). But the fact they miss is that these very-much-lower levels of consumption are the new American norm. No 'surge' upward from here. Just what things will be.

Why?

1. Folks are broke: bleeding equity and savings-less
2. Boomers are getting old, and will not, need not, consume as before
3. GenX has been burned three times already (dot.com, housing, equities) and is in a rather large mood to save
4. Millenials (GenY) know how to save big time and how to spend less. Internet tools very much matter here...

The MSM is still about two years behind figuring out that American over-consumption is very much over. Wall St may never get there.

Your tax dollars at work....

BofA to Boost Rates on Cards With Balances

Bank of America Corp. is raising interest rates on as many as four million U.S. credit-card customers who carry a balance, becoming the latest bank to crack down on people who don't pay off their bill every month.

Starting with June account statements, any credit-card customer who carries a balance and has an interest rate below 10% will see his or her rate jump into double-digit territory. A company spokeswoman declined to provide an exact number, saying the changes would affect less than 10% of the bank's card customers in the U.S. The bank has 70 million card customers world-wide, but doesn't break out the number of customers who are in the U.S. "It impacts a small portion of our cardholders," said Betty Reiss, the spokeswoman.

The bank's move follows similar rate increases that other banks, including Citigroup Inc., J.P. Morgan Chase & Co., and American Express Co. have implemented in recent months. The banks, facing rising delinquencies, blame the economic turmoil. Many have been tightening the screws on people with less-than-perfect credit, but now they're pinching a broader range of customers who have good credit records, but carry a balance.

Besides being beyond unconscionable, this is yet another of the myriad reasons why a 'consumer led' 'recovery' is not around the corner, wishful thinking aside.

I'm increasingly reminded of Spring 2008

All this talk of "the worst is behind us, we've got a grip" is eerily similar to the happy talk post Bear collapse last March/April

A stock rally, optimism on CNBC (what else?), actions by the Fed, analysts calling bottoms in housing, autos, etc, etc etc are in many respects the mirror image of last year at this very time.

What no one still really seems to want to admit as ever - save Obama in the least-reported line from his European trip (Obama: The American "voracious consumer market" has ended) - is that the US consumer is tapped out. And that consumer is even more tapped out now than last year. In fact, they're broke, and have no access to credit, and jobs are disappearing.

Until I hear a credible argument as to how and why folks will start spending like it's 2007, or 1999, or 1985, I cannot believe in any kind of recovery any time soon...

September will be interesting.