Unable to break free from the Pavlovian conditioning to “buy more and be happy”, the American consumer has successfully maintained the protocol of mass consumption despite stagnating wages and income. Of course, this unsustainable trend is encouraging to those wanting to maintain growth at all costs since, without a large and predictable pool of borrowers to willingly grease the lending machine that is our economy, we are told everything will come to a screeching halt and put us in the throes of a second Great Depression.
So, if consumers are still just scraping a living, how are they, according to recent data, continually increasing the amount they purchase every month? Three ways:
Unemployment checks and other forms of government subsidies
Savings
Not paying their mortgage
(Normally, there would be a forth component listed—credit cards—but data suggests that overall credit balances have been steadily falling)
Let’s go through each of these one by one.
Unemployment Checks and Government Subsidies
Without this, the US economy would either be in deep recession or worse. No doubt about it. However, how long is the US government going to borrow money it doesn’t have to pay people for jobs they can’t find? Part of the problem is structural. Our education system doesn’t adequately train young people for jobs that are in need. There is a deficit of engineers, doctors, and other highly skilled individuals, but an oversupply of English, psychology, and political science majors. Regardless, the total number of unemployment checks will either have to be reduced from people finding more jobs, which would require the economy to grow nearly double its current rate, or by a refusal in Washington to extend unemployment benefits—the more likely case.
Savings
As told by the Associated Press, a recent report from the Commerce Department suggests “people are cutting their savings because the interest they are earning has become nearly worthless.” Perfectly good reason to go buy a new car, I’d say! Unfortunately, once a person’s savings has been exhausted, where does that leave them? Back into debt.
Not Paying Their Mortgage
Now, this is interesting: according to the most recent data from Lender Processing Services, almost half of total loans in foreclosure have made no payment for 2 years! Considering that a mortgage takes roughly up to a quarter of a person’s income, that really adds up! How long will this be able to last? Until the massive backlog of homes in foreclosure gets cleared from the system and lenders start to quicken processing. Unfortunately (or fortunately, depend on who you ask), the backlog continues to deepen, which is why some people have been able to pull off living in their house 5 years without a payment.
Today’s Markets:
Stocks closed up much higher today (Dow +178 or 1.53%, Nasdaq +33 or 1.27%, S&P 500 +20 or 1.61%) with better-than-forecast jobs data and Fed comments of possible support to the housing market by purchasing mortgage backed securities. All 10 sectors of the S&P closed higher, with energy and utilities the main drivers.
The Fed decided to keep interest rates the same and also lowered growth forecasts by saying, “recent indicators point to continuing weakness in overall labor market conditions…there are significant downside risks to the economic outloook."
