Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
PAYPAL WARNING - Your Stimulus Funds Are at Risk of Being Frozen for 6 Months! - 5th Apr 20
Stocks Hanging By the Fingernails? - 5th Apr 20
US Federal Budget Deficits: To $30 Trillion and Beyond - 5th Apr 20
The Lucrative Profitability Of A Move To Negative Interest Rates - Pandemic Edition - 5th Apr 20
Visa Denials: How to avoid it and what to do if your Visa is denied? - 5th Apr 20 - Uday Tank
WARNING PAYPAL Making a Grab for US $1200 Stimulus Payments - 4th Apr 20
US COVID-19 Death Toll Higher Than China’s Now. Will Gold Rally? - 4th Apr 20
Concerned That Asia Could Blow A Hole In Future Economic Recovery - 4th Apr 20
Bracing for Europe’s Coronavirus Contractionand Debt Crisis - 4th Apr 20
Stocks: When Grass Looks Greener on the Other Side of the ... Pond - 3rd Apr 20
How the C-Factor Could Decimate 2020 Global Gold and Silver Production - 3rd Apr 20
US Between Scylla and Charybdis Covid-19 - 3rd Apr 20
Covid19 What's Your Risk of Death Analysis by Age, Gender, Comorbidities and BMI - 3rd Apr 20
US Coronavirus Infections & Deaths Trend Trajectory - How Bad Will it Get? - 2nd Apr 20
Silver Looks Bearish Short to Medium Term - 2nd Apr 20
Mickey Fulp: 'Never Let a Good Crisis Go to Waste' - 2nd Apr 20
Stock Market Selloff Structure Explained – Fibonacci On Deck - 2nd Apr 20
COVID-19 FINANCIAL LOCKDOWN: Can PAYPAL Be Trusted to Handle US $1200 Stimulus Payments? - 2nd Apr 20
Day in the Life of Coronavirus LOCKDOWN - Sheffield, UK - 2nd Apr 20
UK Coronavirus Infections and Deaths Trend Trajectory - Deviation Against Forecast - 1st Apr 20
Huge Unemployment Is Coming. Will It Push Gold Prices Up? - 1st Apr 20
Gold Powerful 2008 Lessons That Apply Today - 1st Apr 20
US Coronavirus Infections and Deaths Projections Trend Forecast - Video - 1st Apr 20
From Global Virus Acceleration to Global Debt Explosion - 1st Apr 20
UK Supermarkets Coronavirus Panic Buying Before Lock Down - Tesco Empty Shelves - 1st Apr 20
Gold From a Failed Breakout to a Failed Breakdown - 1st Apr 20
P FOR PANDEMIC - 1st Apr 20
The Past Stock Market Week Was More Important Than You May Understand - 31st Mar 20
Coronavirus - No, You Do Not Hear the Fat Lady Warming Up - 31st Mar 20
Life, Religions, Business, Globalization & Information Technology In The Post-Corona Pandemics Age - 31st Mar 20
Three Charts Every Stock Market Trader and Investor Must See - 31st Mar 20
Coronavirus Stocks Bear Market Trend Forecast - Video - 31st Mar 20
Coronavirus Dow Stocks Bear Market Into End April 2020 Trend Forecast - 31st Mar 20
Is it better to have a loan or credit card debt when applying for a mortgage? - 31st Mar 20
US and UK Coronavirus Trend Trajectories vs Bear Market and AI Stocks Sector - 30th Mar 20
Are Gold and Silver Mirroring 1999 to 2011 Again? - 30th Mar 20
Stock Market Next Cycle Low 7th April - 30th Mar 20
United States Coronavirus Infections and Deaths Trend Forecasts Into End April 2020 - 29th Mar 20
Some Positives in a Virus Wracked World - 29th Mar 20
Expert Tips to Save on Your Business’s Office Supply Purchases - 29th Mar 20
An Investment in Life - 29th Mar 20
Sheffield Coronavirus Pandemic Infections and Deaths Forecast - 29th Mar 20
UK Coronavirus Infections and Deaths Projections Trend Forecast - Video - 28th Mar 20
The Great Coronavirus Depression - Things Are Going to Change. Here’s What We Should Do - 28th Mar 20
One of the Biggest Stock Market Short Covering Rallies in History May Be Imminent - 28th Mar 20
The Fed, the Coronavirus and Investing - 28th Mar 20
Women’s Fashion Trends in the UK this 2020 - 28th Mar 20
The Last Minsky Financial Snowflake Has Fallen – What Now? - 28th Mar 20
UK Coronavirus Infections and Deaths Projections Trend Forecast Into End April 2020 - 28th Mar 20
DJIA Coronavirus Stock Market Technical Trend Analysis - 27th Mar 20
US and UK Case Fatality Rate Forecast for End April 2020 - 27th Mar 20
US Stock Market Upswing Meets Employment Data - 27th Mar 20
Will the Fed Going Nuclear Help the Economy and Gold? - 27th Mar 20
What you need to know about the impact of inflation - 27th Mar 20
CoronaVirus Herd Immunity, Flattening the Curve and Case Fatality Rate Analysis - 27th Mar 20
NHS Hospitals Before Coronavirus Tsunami Hits (Sheffield), STAY INDOORS FINAL WARNING! - 27th Mar 20
CoronaVirus Curve, Stock Market Crash, and Mortgage Massacre - 27th Mar 20
Finding an Expert Car Accident Lawyer - 27th Mar 20
We Are Facing a Depression, Not a Recession - 26th Mar 20
US Housing Real Estate Market Concern - 26th Mar 20
Covid-19 Pandemic Affecting Bitcoin - 26th Mar 20
Italy Coronavirus Case Fataility Rate and Infections Trend Analysis - 26th Mar 20
Why Is Online Gambling Becoming More Popular? - 26th Mar 20
Dark Pools of Capital Profiting from Coronavirus Stock Markets CRASH! - 26th Mar 20
CoronaVirus Herd Immunity and Flattening the Curve - 25th Mar 20
Coronavirus Lesson #1 for Investors: Beware Predictions of Stock Market Bottoms - 25th Mar 20
CoronaVirus Stock Market Trend Implications - 25th Mar 20
Pandemonium in Precious Metals Market as Fear Gives Way to Command Economy - 25th Mar 20
Pandemics and Gold - 25th Mar 20
UK Coronavirus Hotspots - Cities with Highest Risks of Getting Infected - 25th Mar 20
WARNING US Coronavirus Infections and Deaths Going Ballistic! - 24th Mar 20
Coronavirus Crisis - Weeks Where Decades Happen - 24th Mar 20
Industry Trends: Online Casinos & Online Slots Game Market Analysis - 24th Mar 20
Five Amazingly High-Tech Products Just on the Market that You Should Check Out - 24th Mar 20
UK Coronavirus WARNING - Infections Trend Trajectory Worse than Italy - 24th Mar 20
Rick Rule: 'A Different Phrase for Stocks Bear Market Is Sale' - 24th Mar 20
Stock Market Minor Cycle Bounce - 24th Mar 20
Gold’s century - While stocks dominated headlines, gold quietly performed - 24th Mar 20
Big Tech Is Now On The Offensive Against The Coronavirus - 24th Mar 20
Socialism at Its Finest after Fed’s Bazooka Fails - 24th Mar 20
Dark Pools of Capital Profiting from Coronavirus Stock and Financial Markets CRASH! - 23rd Mar 20
Will Trump’s Free Cash Help the Economy and Gold Market? - 23rd Mar 20
Coronavirus Clarifies Priorities - 23rd Mar 20
Could the Coronavirus Cause the Next ‘Arab Spring’? - 23rd Mar 20
Concerned About The US Real Estate Market? Us Too! - 23rd Mar 20
Gold Stocks Peak Bleak? - 22nd Mar 20

Market Oracle FREE Newsletter

Coronavirus-bear-market-2020-analysis

Consumers Will Lead the Way to Economic Recovery

Economics / Recession 2008 - 2010 May 27, 2009 - 06:25 PM GMT

By: Hans_Wagner

Economics

Best Financial Markets Analysis ArticleIn recent recessions, consumer spending led the economy in the recovery. Many investors are counting on the same thing, taking place during this recovery. They will be disappointed.


A Look Back

Before the latest recession consumer spending accounted for more than 71% of the Gross domestic Product (GDP) in the U.S. According to the Bureau of Economic Analysis, in 1970 consumer spending rose to 64.8 percent of GDP. The baby boomer generation was a force in the U.S. economy and they had never experienced a severe depression such as what took place in the 1930’s.  The share increased to 65.2 percent in 1980 and 66.7 percent in 1990. In the economic expansion of the 1990s, along with rising disposable incomes, consumer spending as a portion of the GDP increased to 67.8 percent by 2000.

As shown in the chart below the average Real Personal Consumption Expenditures in each of the most recent expansions has declined from an average of 4.2% in the 1983 to 1990 expansion to 3.1% during the latest expansion. The chart below is from John Mauldin’s “Outside the Box” April 21, 2008.

In the latest expansion, real wage and salary income rose just 1.8%, caused by only a 0.8% growth in payroll employment, the smallest of any expansion since World War II. This is a real concern for the U.S. economy both now and in the future.

What makes the situation even more of a concern is the PCE would have been worse. From 2000 to 2007, consumers took advantage of the rising values of their homes to extract cash through refinancing. The housing and credit crisis we are now experiencing put a stop to this source of cash for consumers. The following chart is from John Mauldin’s Weekly E-Letter, Front Line Thoughts, April 18, 2008. It shows GDP as reported by the government and what the GDP would have been if consumers had not removed cash from the value of their homes and spent it. While the mortgage equity withdrawal has been an on going event, it became a much bigger part of the growth in the US’s GDP starting in 2002. At best, the GDP grew at slightly over 1% after 2000 without extraction of money from increasing home values. The message is the economy did not have significant strength to grow on its own without the increasing leverage taken on by homeowners.

The extraction of cash for an asset that increases in value works as long as the asset continues to grow. When it slows down or reverses course, that source of funds is no longer available. Consumers cannot maintain their level of spending when it depends on the value of their homes increasing at unsustainable rates.

Role of the Consumer in the Next Recovery

This raises the question, what will drive the growth of the economy going forward. According to the Congressional Budget Office (CBO), GDP growth will jump up to 3.8% in 2010 and 4.5% in 2011. Interestingly, they project unemployment of 8.8% for 2009 and that it will rise to 9% in 2010. By the way, unemployment is already 8.9% and is expected to rise further as job losses remain at or above 600,000 per month. In addition, there is a growing population of under-employed that is reaching 15% of the total employed. Many of these people come from high paying jobs, which required them to pay a fair amount of taxes. There are automotive engineers driving taxis, securities traders working at grocery stores and chemists working in call centers. Their industries have cut back and they are unlikely to see new opportunities for some time. The economic stimulus that is funding shovel ready construction protects is not likely to offer these people new opportunities. Many unemployed construction workers will find new work, which is a good thing. However, we should not expect this money to generate work for the many of the unemployed and underemployed. Even the CBO agrees

President Obama has indicated he wants to create millions of green jobs to help wean the U.S. off its overwhelming dependence on oil. It is a laudable endeavor. However, according to a study by Gabriel Calzada Alvarez and economic professor at King Juan Carlos University, it has cost Spain, a leading green energy country approximately $770,000 for each new green job that has been produced. Had the money been spent on other parts of the economy it would have produced 2.2 new jobs. Many people in the administration use Spain as a model for the U.S. If this study is even partly right, it will not be the engine of new jobs as many have hoped. Maybe, some new inventions will come to the rescue. Without then the economy will struggle to recovery.

The stock market crash coupled with the crash in housing prices has had a devastating affect on the finances of consumers. They know that and realize they must save and invest smartly to recover. Consumers are curtailing their spending to provide some of the money to save. They also realize it will take many years for them to recover. This means we should expect many years with lower spending on goods and services by consumers.

Consumer spending is slowing and it will stay restrained for years. In the 1980’s consumers saved 7 – 10% of their incomes. At that time, consumer spending accounted for 63% of the GDP. Now that consumers no longer can depend on their homes to fund their spending and their retirement, they will curtail their spending and increase their savings. I believe the percentage of consumer spending that is part of the GDP will slowly return to the mid 60s over the next several years.

The Bottom Line

Since expansion of consumer spending will not be available to drive the economy, investors will need to look to other segments. The problem is as consumer spending is such a large part of the economy. As they curtail their spending, there isn’t another area that can step in and replace the gap. Even the administrations desire to build a green economy will not be able to make a difference. Investors need to adjust their strategies to recognize this reality.

By Hans Wagner
tradingonlinemarkets.com

My Name is Hans Wagner and as a long time investor, I was fortunate to retire at 55. I believe you can employ simple investment principles to find and evaluate companies before committing one's hard earned money. Recently, after my children and their friends graduated from college, I found my self helping them to learn about the stock market and investing in stocks. As a result I created a website that provides a growing set of information on many investing topics along with sample portfolios that consistently beat the market at http://www.tradingonlinemarkets.com/

Copyright © 2009 Hans Wagner

Hans Wagner Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules