I’m happy to report that I’ve never been in prison. I can only imagine that the first few days and weeks are a terrible period of adjustment. There is no freedom, you cannot choose when to go outside or when to turn the lights off at night, and the food (I’m guessing), is awful.
But after awhile, the newness probably wears off. It’s still jail of course, and people still go through your mail, but you fall into a routine that becomes the basis of your daily life. You acclimate.
Welcome to the US in the middle of the economic winter season. Six years after the official end of the last recession in June of 2009, we’re still talking about when US consumers will ramp up their spending. We need their participation to drive up growth – which has been abysmal.
That view is based on the latest GDP report just released today. Second quarter GDP came in at 2.3% – whereas economists were expecting anywhere from 2.5% to 2.9% – and the first quarter was revised to 0.6% from negative 0.2%.
When did an annualized 1.45% growth rate become a cause for celebration? That’s pathetic!
The fact that this low rate of GDP growth is being discussed in glowing terms is what reminds me of jail.
Acclimating to a Poor Climate
When you’re surrounded by terrible conditions for an extended period of time, you get used to them. Anyone claiming the latest GDP number is a good report has apparently forgotten what real growth is supposed to look like. Unfortunately, 1.45% is now the norm.
US GDP has grown between 1.6% and 2.5% each year since 2009. So far, no amount of wishful thinking or positive spin in the media has been able to revive higher consistent consumer spending. But that doesn’t mean people have – or will – quit trying.
During the worst of the downturn, foreclosures and credit card debt write-offs were common. There’s nothing fun about either of those processes, but they do reduce private debt outstanding.
In the aftermath, consumers not only failed to leverage back up, but they continued paying down their debts.
Aside from student and auto loans, which both tend to affect young buyers, consumer debt remains near its lowest levels in recent years.
Then, every quarter when consumer debt levels are reported, someone comments that consumers now have a lot of spare debt capacity. They assume spending is just around the corner! Then retail sales figures, like last month’s 0.3% drop, dash their hopes.
People also thought the lower cost of gas, which put more money in consumers’ pockets, would drive them to spend more. It was supposed to help businesses too, as they also benefit from lower fuel costs. But just as with the ability to take on more debt, the “gas dividend” hasn’t caused people to spend with abandon.
Instead of blowing every nickel not allocated to gas, consumers chose to either save the money or used it to pay down revolving debt.
This is exactly what we expect during the economic winter season, because the people who comprise the driving force in our economy, the baby boomers, are in their empty nester years.
This stage of life, which spans from age 48 to 64, is marked by higher earnings, less borrowing, and more saving. After paying to raise their kids, these adults are now focused on preparing for the next big change in their economic lives – retirement.
Looking at the economy through their eyes, it’s easy to see why spending isn’t growing dramatically, even though debt is shrinking and the cost of fuel is down. Just because this group can borrow and spend doesn’t mean they will.
Given that we have another five to seven years of boomers running the show before the millennials take over, we don’t expect things to change in the near future. If you’re one of the people expecting a surge in consumer spending, you’re probably going to be very disappointed in the next few years.
For now, our economy is confined to a low level of growth. Our job is to acclimate to it the best we can, like prisoners do in jail, and then prepare for the next great change on the horizon.
When the millennials finally take the reins, the US growth engine will finally accelerate. For now, the best thing to do is pay down debts, save, and have cash on hand for the next great boom.
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