Tuesday, June 12, 2012

Why People Will Remain Reluctant to Spend and Why the Economy Will Remain Sluggish

Here's a bit of sobering, albeit unsurprising, information about the state of the American consumer and individual households.

Old Data on Plunge in Net Worth Still Pack a Wallop says this:

"We are inundated with economic data. It hits us daily, weekly, monthly. Yet one of the most telling numbers to describe the devastation of the recent recession is produced only once every three years and already is old.

Despite those limitations, those numbers fully retain their power. The key number is 40%. That percentage represents the decline in the median net worth of U.S. families between the years 2007 and 2010. The Federal Reserve, in its survey of consumer finances, let us know that Monday.

That is a very big drop, a drop big enough to change people’s world views and long-term attitudes toward what they can and cannot buy. And those decisions, of course, drive the level of economic activity and employment, and around and around it goes.

As it is, in our land of economic data overflow, many of us are willing to change our outlooks, with implications for everything from monetary policy to budget deficit reduction, on the basis of a couple of months of employment figures.

These consumer-finances numbers are much more telling, reinforcing the notion that our post-financial-crisis world is not one we will exit easily and, as we know by now, certainly not quickly.

The data released Monday are the real, step-back deal. In 2010, the median net worth of families stood at $77,300, down from $126,400 in 2007. A lot of that big drop is because of the sharp decline in home values across much of the nation.

You could argue that for the large percentage of people who stayed put in their homes and stayed employed, the 40% number is bigger than its real-world impact. But even if those variables held, the sense of wealth and well-being declined so much as to leave almost no one untouched.

At the same time, some Americans were whittling at their own debt, making the squeeze tighter. The central bank reported the percentage of people with any type of debt fell in 2010 to 74.9% from 77% in 2007.

In those same three years, income also dropped, as there was downward pressure on wages and many families had a breadwinner lose a job and then perhaps settle for lower-paying work.

Things may look modestly brighter for many U.S. families since 2010. There are some reasons to think home prices, at least in much of the country, have bottomed. Despite disappointments, there are net new jobs being created. But that 40% figure is a sobering one, and speaks to the depths of the impact on so many."

Summing Up

The 40% decline in median household net worth from 2007 to 2010 is a staggering amount, albeit unsurprising. Mostly it's due to the recent bubble and then collapse in U.S. housing prices.

Worse yet, the aftermath of the housing bubble bursting will last many more years before finally running its course.

That simply means that consumer spending will be negatively impacted for several more years at least.

Hopefully, future home buyers won't make huge leveraged bets on appreciating housing prices as a "can't miss sure thing."

Of course, there's no such thing as a sure thing when it comes to investing.

Or anything else, for that matter.

Thanks. Bob.

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