Where is the U.S. Consumer?

“Rising Income is Saved, Not Spent,” reads the Wall Street Journal Tuesday morning.

“Personal income increased 0.5% in December from November adjusted for seasonality, the largest monthly increase since March…but spending was flat over the month—actually fell when inflation is factored in.”

“The savings rate, around 5.0% for the first half of 2011, was near 4.0% for much of the second half of the year…. Economists warned that consumers would soon resume socking away cash at the expense of spending, and that appears to be playing out now.”

With unemployment still high and the housing market in the doldrums, consumers are reluctant—and in many cases unable—to increase their spending in a big way.”

The Federal Reserve’s recently released forecast projected unemployment rates remaining at high levels through 2014, declining only slightly throughout the next three years. And, even worse, underemployment is also expected to remain high with the rate of underemployment staying near to one out of every five people of working age. No help coming here.(

Furthermore, a large proportion of homeowners still find themselves “under water” with mortgages that exceed the market value of their houses. This situation is not expected to improve in the near future.

Robert Shiller, the Yale economist, was just interviewed at Davos and responded to questions about home prices by saying that prices will probably continue to decline, although not at the rate they declined in recent years. He added that even if housing prices did stop declining, there is no reason to expect that they would start to rise anytime soon. In addition, he added, that even though housing prices were returning to something more like a “fair value” that historically, the tendency was for the market to “overshoot” the “fair value” until all the previous exuberance is wrung out of the market. (link)

A White House effort to lessen the impact of these homes that are “under water” seems to have failed in that the program developed by the administration has not reached enough borrowers to have much impact on the market. (link)

Even more chilling is the report released today by the Corporation for Enterprise Development (CFED) titled “The 2012 Assets & Opportunity Scorecard: How Financially Secure are Families?” (Go to http://cfed.org/.) This study presents what it calls the households that are in “liquid asset poverty”. A household is considered in liquid asset poverty if it owns a home, yet has no savings to speak of. These people are just one significant emergency away from a real financial crisis.

The emergency could take the form of a major car breakdown or a health problem. Most of these people are earning a regular paycheck, CFED says, but they don’t really realize how close to the edge they are living. Many have some other form of debt, but in an emergency would have to rely on very expensive sources of debt to try and carry them through the emergency.

The study reports that 43 percent of the households in the United States are liquid asset poor. This amounts to roughly 128 million households.

Again, we seem to see the country bifurcating. There are those households that are doing OK and are continuing to spend through these tough times. Yet, there are a large number of people that have to watch out where every penny of their income is going. This means that the economic recovery will not only remain week, but it will be fragile and susceptible to unexpected shocks.

Saving and deleveraging are still needed and being sought by many families, but this will just mean that the recovery will be missing any strong support from consumer spending in the near term.

And, it means that banks and other financial institutions cannot be sure of value of many of the assets on their balance sheets, both mortgages and consumer loans, but also face the fact that loan demand will also not be strong in the future.

We are still looking for where the surge in economic activity will come from.

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