Here are some clips from a well respected newsletter put out by the Dow Jones Market Watch about consumer spending, deleveraging and where we are headed in this economy:
“Consumer debt has risen to a record 128% of disposable income, twice the debt level they carried 25 years ago. Their wealth has been shredded, and wages are falling. Credit is hard to obtain, yes, but many consumers are actively trying to reduce their debts, not add to them.
Consumers are in no position to drive the economy forward and, until they are, businesses won’t expand. Already, industrial capacity utilization has fallen to a record-low rate, indicating that companies have plenty of idle capacity to deploy before they need to build more.
The American economy has become more and more dependent on consumer spending over the years. In the 1960s, consumer spending accounted for about 63% of GDP. In the 1990s, it rose to 67%. But now it’s at a record 72%, thanks to the massive debt load consumers are carrying.
To achieve sustainable growth, either the consumer must spend more, or the economy must restructure to become less reliant on the consumer.
Unfortunately, either option will take time. Researchers at the San Francisco Fed found that it could take until 2018 for consumers to deleverage enough to be satisfied. If consumers raise their savings rate from near zero during the bubble to 10% by 2018, it would cut three-quarters of a percentage point off the typical 3.5% growth in consumer spending, according to researchers Reuven Glick and Kevin Lansing.
No jobs, no wage growth. It might take years for the labor market to fully recover as well: Most members of the Federal Open Market Committee said they expected it “to take five or six years” to bring the unemployment rate down to its long-run potential of around 5%. Job losses have slowed, but they haven’t stopped. The unemployment rate is expected to peak near 11%, according to Roubini. With a current jobless rate of 9.5%, there are now nearly six unemployed people for every job opening. For the first time since the Depression, most of those who are unemployed have lost their jobs permanently.
With so much competition for jobs, wages are dropping. The total wage bill for private industry has fallen at a nearly 5% annual rate over the past six months, the largest decline in the 50 years those data have been kept.
The only thing adding to income growth right now is government transfers, either from automatic stabilizers such as unemployment insurance or from the tax cuts in the stimulus package. Income from private sources declined in all 50 states during the first quarter.
The stimulus has now ramped up. While more money will be coming from Washington each month, the level won’t increase. Economist Dean Baker of the Center for Economic and Policy Research figures we need $1 trillion in extra stimulus per year to drive the employment back to 5%, but we’re getting only about a third of that.”
By the sounds of it, now is the time to get rid of your credit card debts. This is and unprecedented time known as the great American debt explosion.
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on Wednesday, July 29th, 2009 at 5:37 pm and is filed under Credit Crisis.
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