Is There A V-Shape Recovery Of The Consumer Psyche

For the last year or so Larry Kudlow, whose ideas and views I agree with almost always, has been promoting and rightly so the idea of a V-shaped recovery of our economy. There is no question that such a V-shape recovery has been underway as supported by numerous economic data. But the questions remain "is this recovery sustainable?" And "what is fueling it?". The answer to the first question in my opinion is NO because any sustained recovery is contingent upon the ability and willingness of the [end]consumer to spend. After all, all goods and services are produced for the end user - the consumer. In this blog I will attempt to explain why the consumer will remain weak for many years. I'll leave the answer to the second question to a later blog.

The shock that the U.S. economy, indeed the world economy, suffered over the last three years or so is far more damaging that many would accept beyond the quantitatively captured harm. It was not a normal and a necessary healthy recession that every free economy needs every now and than to rid of excesses. This recession shook the very foundation upon which a free capitalist system is based- and that is the concept of credit availability to fuel demand, and by extension the manageability of debt, both on the individual and government levels.

It is not the intention of this piece to argue the causes and responsibilities of this enormous shock, but to explore the consequences it left behind. To understand this one has to understand that consumer behavior is like many other human behaviors based on confidence. Once this confidence is broken one has to go through a series of steps, processes and time to gain it back. The deeper the crack the longer the build up process. This notion applies to the entire chain of economic activities. Meaning that each entity in the system (a government, a manufacturer, a doctor, a bank, a lending officer, a purchasing manager, a teacher, a cab driver etc,....) at some point is a consumer in his/her business entity capacity and has to make decisions just like the end consumer does. It is hard to see how a bank or a bank officer can lend money to a confidence shaken business or decision maker just as it is hard to see how the end consumer, who for years used an artificially inflated asset price (his/her house)to fuel an unprecedented level of demand for all goods and services produced, can embark on a shopping spree the kind of which we experienced over the last decade or so. Yet that is exactly what wee need to sustain the V-shape recovery. Remember not only has that end consumer seen the value of his/her largest asset and piggy bank plummet in value but he/she has also watched his/her retirement fund plummet as well. So now the piggybank is gone and any future earnings has to go to replenish the retirement fund and for many who were hoping to retire soon now have to extend their working years. Not to mention the pile of individual (and public)debt accumulated during the boom years. I ask you does this bring confidence back to a broken psyche? Therefore, there is neither the ability (credit availability) nor the willingness (consumer behavior)for this recovery to sustain itself at the pace it has for the last year. Given the global economic conditions and the amount of sovereign debts the world has to deal with the U.S. economy will grow at a very tepid pace in the years ahead.

It is also worth mentioning that business entities are made of individuals whose personal experiences heavily influence their decisions- bad memories tend to linger for a while.

Some may say that the same economic figures that point to a V-shape recovery also point to an engaging consumer. That may be true to a certain extent. Still one has to ask what is fueling this limited consumer participation. Many are the answers embedded in the same economic figures. Others have offered countering answers that, if true, spell a pretty disturbing picture (such as people who are upside down on their mortgages intentionally skipping payments-thanks, in part, to all the government bailouts- and spending that money elsewhere). However, these figures reflect a bounce from a very steep drop and the unemployment rate is still near 10%. My answer to those who say that the other 90% are still employed is twofold. First, remember that many have to work harder and longer and save more in order to replenish some of what was lost in this crisis. Many had counted on their home price appreciation as the retirement fund. Second, we need that other 10% working to fuel the extra end demand needed to sustain a V-shape recovery.

This is not a gloom and doom view. It is merely a realty check. The sooner and the more embracing we are of the facts the faster the recovery is and the more reasonable expectations are. This is not a consumer lead recovery. This is a liquidity driven short term bounce.

In short there is no V-shape recovery of the consumer psyche. It is time to tighten the belt one more notch and acknowledge that a lower standard of living await us all.



Coming soon:

Does Gold Glitter?

China Not The Savior Some Thought

Sovereign Debt: Can More Debt At Higher Cost Bring Debt Relief?