IS THE RECESSION REALLY OVER? June 5, 2009

BEING STREET SMART

Sy Harding

IS THE RECESSION REALLY OVER? June 5, 2009.

The current popular opinion is that the recession, which three months ago was supposedly plunging off a cliff into Great Depression II, is instead already bottoming and on the verge of surging ahead into the next economic boom times.

Consumer spending is supposedly going to lead the way, the recent rise in consumer confidence convincing Wall Street analysts that consumers will provide the power that achieves the fast turnaround.

There’s no doubt about it, consumer spending can be a powerful presence in the economy. The 2001 recession ended (very slowly) after then President Bush appealed to consumers to get out there and spend the country out of recession, even if they had to go in debt to do so. Interest rates on loans and mortgages were dropped to near record low levels, and economic stimulus checks and rebates were sent to most households. The idea was to send a message to terrorists that the U.S. would not shrivel up in fear, but would carry on in confidence.

It worked better than probably anyone hoped. Since business spending never did pick up its share of the load, consumers had to keep on keeping on until consumer spending became almost 70% of total GDP.

Can consumers do it again? And if they can, will they?

As far as can they, it’s doubtful they can any time soon. Consumers are still weighed down by the major problems created by their previous borrow and spend binge; in over their heads on mortgages on overpriced homes, record credit card and other loan debts, with lenders now unwilling to lend, and credit card companies raising rates for even their best customers.

Then there are the 6 million consumers who have lost their jobs, raising the unemployment rate to 9.4%. And jobs are still being lost at a fast pace. While monthly job losses declined in April and May, to 504,000 and 345,000, which is encouragingly better than the 650,000 plus jobs lost in the winter months, it is still more than the 250,000 jobs being lost monthly last fall, and has experts forecasting that 9 million jobs will be lost before the employment picture bottoms and begins to recover.

Already high debt loads and high unemployment make it unlikely consumers can buy enough additional goods to pull the economy out of recession anytime soon.

But even if they could would they this time.?

Evidence is quite strong they would not. Recent reports on consumer income and spending show a sharp reversal from the trend of the last 20 years, to a determination to save rather than spend. For instance in April consumer incomes rose 0.5%, but consumer spending declined 0.1%. Money is going into savings and into paying down debt. The latter is understandable given the way credit-card providers have raised interest rates on unpaid balances.

The great consumer retrenchment that is underway can also be seen in the report that retail sales were down 10% in April from the previous year, and in this week’s dismal report of retailers’ same-store sales for May, in which 65% reported sizable sales declines. Some were mind-boggling declines, Abercrombie & Fitch sales down 28%, Macy’s down 9.1%, JC Penney’s down 8.2%, Saks down 26%, Target down 6.1%.

Hope is also high that consumers will start buying ‘big ticket’ items again and pull the housing industry out of its deep dark hole, and maybe even the auto industry.

But the facts don’t provide much support for that hope either.

Existing home sales did increase 2.9% in April. But in spite of the increase in sales, the glut of unsold homes increased by 9%, as still more homes came on the market than were sold. It’s also not all that great that 45% of the sales were foreclosed properties, or properties in default, sold at fire-sale prices. With the soaring rate of foreclosures, that indicates home prices will likely continue to decline.

Consider also that mortgage rates were extremely low in April, as low as 4.7% on 30-year mortgages, while they have now spiked up again to this week’s national average of 5.6%.

Watching the value of their homes continue to crater, along with rising unemployment and worries about their jobs, is not likely to encourage consumers to get out there and begin to spend the country out of this recession just yet.

I believe Wall Street and the media has gotten too far ahead of reality on that expectation.

Sy Harding publishes the financial website www.StreetSmartReport.com and a free daily market blog at www.SyHardingblog.com.