The depth of this recession, plus widespread expectations that unemployment will keep rising into 2010 and remain high thereafter, may exert a powerful drag on the recovery.
Shortly after the 1990-91 recession, consumers went out and bought houses, cars and other expensive goods on credit, noted Richard Curtin, director of the University of Michigan consumer sentiment survey. That helped boost job growth in construction, manufacturing and other industries.
Consumer spending accounts for about two-thirds of U.S. gross domestic product.
However today, Americans have abruptly switched from living beyond their means to saving more and working down the debts they incurred during the bubble years. This time around, because of the severe credit crunch, people won't be able to get financing as easily as they did in the 1990s--while many others who can borrow will be reluctant to do so, Curtin's survey's indicate.
Instead of leading the way to a more vigorous economy, consumers are saying they want to save and keep their personal debts low. Americans socked away almost 7 percent of their after-tax income in May, the highest rate in 15 years.
That's what scares Howard Roth, chief economist at California's Department of Finance. The nation's biggest state has been hit particularly hard by the housing meltdown, and its jobless rate is already hovering at 11.5 percent.
"If you look at the situation of consumers--home equity, it's gone away. The stock market has wiped away retirement savings," Roth said. "The consumers are not going to be able to spend as much as before."
Source: Ann Arbor News, July 2, 2009