Economists Say the Recession’s Over; How Consumers Beg to Differ

“The Financial World According to Inya” Column,
by Inya Ivkovic, MA

Today’s economic data are likely going to say that the U.S. economy finally started growing in the third quarter for the first time in over a year. It is the long awaited sign that recovery might finally be on its merry way. The consensus among economists is that the U.S. GDP will have grown at least three percent from July 1 to September 30 and some are even calling for the growth rate of four percent. Economists might be calling for the end of recession, but it seems that the one variable that counts the most, the U.S. consumer, is still far too depressed to think it worth resurfacing.

The key to swinging the consumer sentiment pendulum in the opposite direction was to see whether near-zero interest rates, economic stimulus, and recovering housing market were enough to jump-start growth in jobs. Unfortunately, the job front is still dead. So, while the trend may have started reverting, the pendulum certainly has not swung far enough.

Not helping the situation is the uncertainty about what awaits us in the next few quarters. The impact of government spending is slowly, but surely, weakening. “Cash-for-clunkers” and tax credits for first-time homebuyers are just a couple of programs that will soon be off the table. Additionally, much of the expected growth is output in reaction to the severe recessionary hits. As manufacturers replenish their drained inventories, this restocking is making up for the lost ground, not reaching for new heights.

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According to the latest U.S. Conference Board, consumer spending makes up approximately 70% of the U.S. economy. In other words, if consumers remain essentially negative when it comes to getting jobs and having more disposable income, then their buying is going to remain low to non-existent. And, unless consumers are actually buying, the expected output growth between three percent and four percent cannot be anything more than businesses trying to get back on track. To illustrate, according to the Conference Board’s recent survey, consumer confidence from September to October actually declined, rather unexpectedly at that, from 53.4 to 47.7.

Consumers participating in the U.S. Conference Board’s survey were very specific in their views. They were extremely pessimistic about the labor market and not very likely to buy houses and cars in the next few quarter. Even with “cash-for-clunkers” deals out there, the number of Americans intending to buy a car has plummeted to the record low of November of last year.

The official authority on U.S. economic cycles is the National Bureau of Economic Research (NBER), which employs stringent rules in determining changes in the cycles and uses more than just quarterly output figures to make its determinations. Items that also play a role are income, retail sales, manufacturing activity, and new jobs. Usually, NBER would not declare that a recession has ended until after a year or more after it started.

According to NBER, the official start of the Great Recession was December 2007. The majority of U.S. economists believe it also has ended sometime this past June or July, which would have made it the longest period of economic decline since the Great Depression. Even NBER is bound to provide its opinion on the end of recession soon, particularly considering that the housing sector is no longer the hindrance to the economy.

And yet, all these predictions, expectations, and past experience will likely mean squat until the U.S. consumer feels confident to start spending again. Likely, that same consumer, if and when he starts spending again, is going to be much, much more careful in his spending habits and much less reliant on borrowing. Thus, any future growth driven by the U.S. consumer is likely to fall below the pre-recession figure of 70% of the U.S. economy and slow down U.S. economic output rates in the quarters to come.

Economists Say the Recession’s Over;
How Consumers Beg to Differ

Today’s economic data are likely going to say that the U.S. economy finally started growing in the third quarter for the first time in over a year. It is the long awaited sign that recovery might finally be on its merry way. The consensus among economists is that the U.S. GDP will have grown at least three percent from July 1 to September 30 and some are even calling for the growth rate of four percent. Economists might be calling for the end of recession, but it seems that the one variable that counts the most, the U.S. consumer, is still far too depressed to think it worth resurfacing.

The key to swinging the consumer sentiment pendulum in the opposite direction was to see whether near-zero interest rates, economic stimulus, and recovering housing market were enough to jump-start growth in jobs. Unfortunately, the job front is still dead. So, while the trend may have started reverting, the pendulum certainly has not swung far enough.

Not helping the situation is the uncertainty about what awaits us in the next few quarters. The impact of government spending is slowly, but surely, weakening. “Cash-for-clunkers” and tax credits for first-time homebuyers are just a couple of programs that will soon be off the table. Additionally, much of the expected growth is output in reaction to the severe recessionary hits. As manufacturers replenish their drained inventories, this restocking is making up for the lost ground, not reaching for new heights.

According to the latest U.S. Conference Board, consumer spending makes up approximately 70% of the U.S. economy. In other words, if consumers remain essentially negative when it comes to getting jobs and having more disposable income, then their buying is going to remain low to non-existent. And, unless consumers are actually buying, the expected output growth between three percent and four percent cannot be anything more than businesses trying to get back on track. To illustrate, according to the Conference Board’s recent survey, consumer confidence from September to October actually declined, rather unexpectedly at that, from 53.4 to 47.7.

Consumers participating in the U.S. Conference Board’s survey were very specific in their views. They were extremely pessimistic about the labor market and not very likely to buy houses and cars in the next few quarter. Even with “cash-for-clunkers” deals out there, the number of Americans intending to buy a car has plummeted to the record low of November of last year.

The official authority on U.S. economic cycles is the National Bureau of Economic Research (NBER), which employs stringent rules in determining changes in the cycles and uses more than just quarterly output figures to make its determinations. Items that also play a role are income, retail sales, manufacturing activity, and new jobs. Usually, NBER would not declare that a recession has ended until after a year or more after it started.

According to NBER, the official start of the Great Recession was December 2007. The majority of U.S. economists believe it also has ended sometime this past June or July, which would have made it the longest period of economic decline since the Great Depression. Even NBER is bound to provide its opinion on the end of recession soon, particularly considering that the housing sector is no longer the hindrance to the economy.

And yet, all these predictions, expectations, and past experience will likely mean squat until the U.S. consumer feels confident to start spending again. Likely, that same consumer, if and when he starts spending again, is going to be much, much more careful in his spending habits and much less reliant on borrowing. Thus, any future growth driven by the U.S. consumer is likely to fall below the pre-recession figure of 70% of the U.S. economy and slow down U.S. economic output rates in the quarters to come.