Consumer Downer

All of my warnings about the medium term outlook seem to be confirmed by today’s consumer sentiment survey results from the University of Michigan. This is the third, and most frequent, of the surveys that attempt to measure consumer confidence. The data released this morning suggests a modest uptick from early October – the index rose from 66.4 earlier this month to 70.6 presently. Unfortunately that rise didn’t manage to get us all the way back to the recent peak of mid-September when the index stood at 73.5.

Digging into the details reveals a theme that is now pervasive and, frankly, disturbing. Consumers are so concerned about job security and consequently their ability to pay their bills, that they rank saving and eliminating debt well above spending in their list of priorities. The cause for this pessimism is that a majority of those surveyed reported declining incomes for the thirteenth straight month – an unprecedented run of decline. Moreover the number reporting any kind of gain in income is now the worst for over sixty years. This is no ordinary cloud of pessimism, this is a veritable storm.

Without employers ceasing the incessant beat of layoffs I see no reason for this downbeat attitude to melt. That implies we are headed into a period of increased savings and lower consumption. That, in turn, is the very worst thing that could happen right now.

Now, I say repeatedly that one month’s data does not make a trend. So we will watch consumer confidence closely as we enter the ‘normal’ holiday spending season.

Interestingly yesterday’s GDP report had buried within it the news that consumers had increased spending across a broad front – evidently poor confidence didn’t hamper spending too much over that late summer. But, most of the impetus in sales came from the now defunct ‘cash for clunkers’ program. Car sales have plummeted since its end, which leads me to wonder just how robust consumption is without the boost given to it by government stimulus support. Also in the GDP data was the news that third quarter consumption ran well ahead of earnings. This means that consumers were forced, in the face of declining wages, to dip into savings or run up extra debt in order to be able to buy. That all took place earlier in the summer when confidence was growing from the depths it reached late last winter and in the spring. Since then the mood has shifted: even though the aggregate figures tell us the recession ended the average consumer still feels the chill of recession lingering on. Wall Street may be partying again as their government subsidized business booms, but Main Street is stuck in the cold waiting for something to trickle down from the financier’s table.

It won’t.

We now have two distinct economies: a Wall Street one, where bankers, accountants, and lawyers wheel and deal with each other gambling in dark pools and hidden beneath layers of obscure, high risk, and economically worthless activity; and a the real economy where employers relentlessly have to scale back, consumers lose homes, and most folks feel successful if they hang on for another month.

I have argued for years that this separation is both inevitable and harmful. Inevitable because a world governed by laissez-faire capitalism always produces small pockets of huge wealth – this is the lesson of history that advocates of free-wheeling unregulated market economics have yet to absorb. And harmful because rising inequality always produces a populist backlash, extreme politics, and ultimately unsustainable growth. This is the second lesson from history that the free-wheelers prefer to forget.

The economy we now live in is horribly split apart: the middle class is reduced to a feeling of siege – the consumer sentiment indices all tell the same story. The golden years of the recent past was between 1950 and 1970 which were the glory days of the middle class. The prosperity then was constructed on a firm regulatory foundation. The implicit contract was that the upper echelon of society behaved responsibly, banks were fiercely regulated, and allowed unions to prosper and protect wages. The lower echelon, in return for receiving a regularly increasing share of national wealth, saved, consumed, and was quiescent at work. It was a triumph of balance. The expanding middle class this balance produced provided the flow of workers and consumers business needed to build huge profits.

Unfortunately all this was destroyed in the 1980’s when complacency had set in sufficiently that we all imagined we could rise into that higher echelon. The American dream mythology sprang to the fore as a tool in the hands of the conservatives who wanted to undo the post war contract, especially its New Deal and Great Society aspects. The market worldview penetrated every aspect of our lives, the balance was swept away and anything smacking of regulatory limitation was eliminated.

We re-built the 1920’s. On purpose. And with gusto.

Why no one thought about what followed the 1930’s eludes me.

We did everything we could to build an economy bound to crash. We kept voting for policies discarded in the past. We re-invented theories proven false. We unleashed a mayhem our grandparents paid dearly to stifle.

We were fools.

But happy fools.

Now we face long dreary years of sensibility as we put away the Reagan illusion and rediscover the dullness of Eisenhower.

Today’s confidence numbers hint, but only hint, that most folks sense this. We need a little of that old fashioned Yankee spartan life. We need to stop spending above our means. We need restraint. We need to limit the wildness of business. We need to rein in the gamblers who profit from our demise.

All this will take time.

During that time I expect our economy to grow less rapidly than it has in the past. That’s a good thing. Much of the growth we registered in the last thirty years was built on sand. It was false. We have revealed the extent of the fallacy and now need to exert ourselves in the cause of sobriety.

Continuing with two economies won’t do. Income inequality breeds anger and resentment such as that we see in reaction to the bonuses that flow on Wall Street. Bonuses that are returning even while the vast majority struggle. The CEO of Goldman Sachs revealed his opinion about the plight of Main Street just last week: he defended inequality and bonuses on the basis that the wealth will trickle down to the masses eventually. He declined to define just when ‘eventually’ is. Presumably after he has retired. He evidently hasn’t studied the last thirty years. He, equally evidently, doesn’t want to. If he did he would see the living disproof of his statement.

Inequality matters.

The economy of the next few quarters depends upon getting the middle class out of the mire. That involves taxes on wealth and profits in order to re-establish and shore up safety nets. It implies slowing growth at the top so as to make the opportunity broader lower down.

The economy is neither zero-sum nor totally open, it is in the middle. Today’s reading on consumer confidence shouild sober up that Goldman CEO: no one believes him. He represents the thinking that caused all this. He’s very old hat, and he needs to wise up.

We need to re-balance. Quickly.