Smart Money with Keith Springer Saturdays at 1PM and Sundays at 6AM on NewsRadio KFBK 93.1 FM and 1530 AM

Business week steals my story!

Posted At : July 31, 2009 9:59 AM

Well not exactly, but the main story about the Incredible Shrinking Boomer is what I have been the intense focus of my work for the last several years! Buy the issue, the story is a MUST READ. It discusses the demographic story I first wrote about in my Economic Tsunami special report (for a copy, just ask me. I now have the report in pdf. format to email. It’s as pertinent today as it was when I wrote and published it back in February 2008) of the aging baby boomer turning from net spender to net saver. With 70% of GDP driven by consumer spending, “A hard rain is gonna fall!” I’ve have been writing about the need for the boomers to start putting more of their money into savings and less into discretionary spending for some time. The Business Week article puts it into the mainstream. The boomer’s were such an integral part of the spending culture that the group (79 million) accounted for 47% of national spending before the credit and real estate bubble burst, yet was responsible for just 7% of national savings. The boomers were responsible for 78% of the spending growth in the economy from 1995 to 2005. The rising savings rate, which sat below zero last year will rise to more normal levels of 8-12%. This alone will drain $400 billion to $1 trillion out of consumer spending for the foreseeable future.

So here we sit. The recession is not quite two years old. Every day we are hit with increasing unemployment, lower incomes, rising taxes, and more – a relentless stream of bad news. We wonder whether it will ever end. And the answer is that of course it will. And it may be ending now. But this is going to feel like a very different recovery from what we normally think of as recovery. It will be more of a statistical recovery than a real one. So we may be close to the official “end” of the recession the media touts, but will it be a real recovery for you and me? No, it just means that things aren’t getting worse. This is going to be a long, jobless recovery.

Hours worked per week are at an all-time low with part-time work very high. Employers, when things actually start to turn around, and they will, will first give current employees more hours and then expand the hours of part-time workers. There will be few new jobs for a long time. Because our population is growing, between 130-150,000 new jobs are required each month to keep unemployment from rising. Initial and continuing claims suggest we are currently losing at least 300,000 a month. (As an aside, the media talks about initial unemployment claims falling. That is actually not true. Unemployment claims are in fact quite high and rising, but the seasonal adjustments make them look smaller. Normally, this would not be a big deal. But the summer seasonal adjustment assumes a normal automobile manufacturing market, with layoffs in July. The layoffs came much earlier this year, distorting seasonal adjustments.) Higher and persistent unemployment, lower incomes and wages, higher savings rates, capacity utilization at 50-year lows and still falling, rising home foreclosures, a deleveraging financial system, etc. are not the stuff of “V-shaped” recoveries. Throw in that Moody’s estimates that US banks will have to write off $400 billion in 2010, and it’s a very weak recovery indeed that shapes up for next year.

We are finding that level of the New Normal. At some point, businesses will have to restock the shelves, and that will be a nice blip up. However, rail shipments are down by almost 20% from last year, and UPS package volume is down 4.7%, and that is from last year’s already depressed levels. At some point you finally get to bottom. Housing, inventories and business investment stop subtracting from GDP, and the GDP stops shrinking. So a positive GDP for the 3rd or 4th quarter is inevitable. But it’s not going to feel like the end of any recession any of us have ever felt. Even the trade balance is getting better, but the fact that we are buying less from outside of the US (imports) may show economic weakness. From a statistical point of view that is positive for GDP.

The hopeful will talk of recovery, because it has always worked that way…in our lifetime. The media is currently telling us now that earnings are coming in above expectations. But expectations have been lowered so much that the target is much easier to hit. Even then, the “upside profit surprises” are coming from cost cutting, which is not sustainable as a profit center, at least not if you are trying to grow the business. And laying off employees, while perhaps good for the profits of one company, is not good for the overall economic business environment. Is that a recovery? Certainly not for the 10%-plus people who will not have a job next year or for the additional 7% (at least) part-time employees looking for full-time work. Go back to 2001. We had “the end of the recession.” Bulls were out in force, trying to talk up the market. But unemployment still rose for almost a year. And the stock market noticed, going up then plummeting. The market did not really take off for well over a year, and actually continued to slide into 2002. The difference this time is that this 2007-2009 cycle has double the asset deflation and triple the job loss. Toss in the massive deleveraging and credit collapse, and it is going to take even longer for the consumer to come back this time around.

Regards – Keith Springer

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