Thursday, March 24, 2011

Mort Zuckerman On The Anemic Recovery

Mort Zuckerman wrote a provocative editorial in last Thursday's Wall Street Journal concerning the anemic recovery in the US. He echoed some of my concerns, but provided interesting metrics to substantiate them.

For example, consider this passage,

"Quite simply, it is because households are still carrying far too much debt on their balance sheets. Relative to income, debt today is approximately twice as high for families as it was in the 1980s. Total borrowing in relation to disposable, personal after-tax income leaped to approximately 136% in the first quarter of 2008 from 60% in the early 1980s before it began to recede. It has now declined to 117% of income compared to the pre- bubble norm of 70%. To return to that level, debt would have to be reduced by another $6 trillion. Similarly, the debt-to-asset ratio in relation to household assets is currently 20%, but the pre-bubble norm was 12.5%. The deleveraging process still has a long ways to go.

As more U.S. households pay down their debt, the slowdown in consumer spending will continue. The savings rate, which had averaged 8.6% during the 1980s and 5.5% in the 1990s, dropped to an alarming 2.8% in the 2000s. No longer are households engaging in mortgage equity cash-outs to the tune of over $80 billion per quarter, as they did in 2006. Cash-out refinancing today has dropped by 90%, contracting the available funds that helped power the pre-2007 spending binge."

In short, Zuckerman cites the data which explain why even the very slow job growth that seems to be fretfully emerging is not going to be sufficient to cure our ills. We're experiencing and witnessing continuing consumer de-leveraging after a decade of financial decline.

If you look closely at these comparative statistics, it describes how much different the decades of the 1990s and 2000s were from the 1980s. That earliest decade was, at the time, considered one of prosperity. Yet, in terms of personal financial balance sheets, it was relatively restrained.

From the perspective Zuckerman provides, the last twenty years have truly been an aberration.

Zuckerman continues by observing,

"Not surprisingly, middle-class Americans are growing increasingly leery of debt. This trend will continue as more families realize their retirement nest egg is going to be a whole lot smaller than they expected. Credit cards provide a marker. In a survey taken towards the end of last year by Javelin Strategy & Research, only 45% of households used credit cards in 2010, compared to 56% in 2009, and 87% in 2007.

Virtually every index of consumer sentiment supports this sense of consumer restraint. In a recent poll taken by the Pew Research Center, 71% of American consumers say they are buying less expensive brands, 57% say they have trimmed or eliminated vacations, 11% have postponed marriage or children, and 9% have moved in with their families, reducing spending on alcoholic beverages, clothing and restaurants. In other words, roughly 25 million unemployed or partially unemployed Americans are focusing on basic necessities. They make up a part of the 42 million Americans on food stamps.
Quite simply, American households are seeking to become net savers, not net borrowers. This is hardly surprising when real median household incomes are down over 4% from the 2000-2009 decade, according to recent research conducted by Mr. Rosenberg at Gluskin Sheff. Net worth has declined by more than $100,000 for the average household compared to just three years ago, and total household net worth is $12 trillion lower today than at the pre-recession peak—an unprecedented decline of 18.5% over three years. The bulk of this loss comes from diminished home equity, and with more than six million homes in inventory or in foreclosure, prices have been declining again for the past six months."

Here, Zuckerman has provided some of the income and spending details to identify why and how the consumer balance sheet changes he noted in the previous passage are occurring. It's stunning stuff, is it not? These are the sorts of behaviors probably last experienced forty years ago, during the Carter-era stagflation. That is, American families making sizable lifestyle changes in order to survive,

"In short, the triple whammy of weak consumer sales, a weak housing market, and a deeply anemic job market is still very much with us. There are no quick fixes to the post-bubble credit collapse. The painful process of deleveraging is far from over. Current debt loads are not sustainable either by incomes or asset values, which are falling.

That's why our economic pulse is so weak. Real GDP growth is less than half of what one would ordinarily expect to see coming out of such a deep downturn. And there has been virtually no recovery at all with respect to housing, income levels and employment."

So there you have it in a nutshell. Consumer deleveraging, by the numbers. The related income and expense consequences. I think the data are convincing and compelling. We have a signficant shift in consumer economic and financial behaviors.

In conclusion, Zuckerman wrote,

"The government's February jobs report reaped a slew of cheerful headlines. But much of the bounce came in construction, where workers were kept idle by January's snowfalls. Job gains for the past three months averaged just 135,000—we need 150,000 a month just to keep pace with population. And government figures don't take into account the two million plus discouraged workers who've dropped out of the labor force over the past year and a half and are still unemployed. If counted, the jobless rate would have been 11.5% in February."

I don't particularly agree with his final comments suggesting another federal stimulus, whether monetary or fiscal. But his analysis of the current US economic situation is, I believe, correct. The trouble is, many want government to do something. Nobody seems to be capable anymore of simply accepting the pain and consequences of prior economic mistakes.

But now, that's probably what is necessary for the US economy to fully recover to its potential.

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