Spring seems to be round the corner one day and not the next, but the pace and timing of our economic recovery are even more uncertain. They will largely be determined by you and me and our neighbors—we consumers—since consumption makes up roughly 70 percent of our national economy.
Let's look at the tea leaves. For a start, we are a lot poorer. With house and stock prices way down, household net worth (assets minus debts), which peaked in mid-2007 at roughly $64 trillion, fell to $51 trillion by the end of 2008, a decline in excess of 20 percent.
Where once the average family felt that it did not have to save out of income but could rely on the rising value of homes and stocks, today we are saving like Scrooge on steroids. The savings rate has gone up from one-tenth of a percent of income in January of 2008 to 5 percent of income in January of 2009. That is the largest 12-month increase in the more than 60 years the government has been compiling the figures. Indeed, the rate is headed toward what had been the normal average, 8 percent of income, and possibly higher.
Households have quickly cut back on postponable purchases and discretionary items, especially big-ticket consumer durables such as autos, furniture, and appliances. Spending on consumer durables in January was the equivalent of only 8.9 percent of disposable income—a multi-decade low, according to JPMorgan Chase; and new-car sales represented only 5.9 percent of disposable income, sharply below the preceding five decades' average of 10.3 percent. The fall in gasoline prices has been a boost for disposable income, but not enough. Even spending on clothing, shoes, and food relative to disposable income has been falling to new lows. Department store sales are down almost 10 percent—whereas discount stores are up about 4 percent. Similarly, family restaurants are having a hard time, compared with low-priced fast-food chains. Wal-Mart and McDonald's have been the beneficiaries.
The upshot is that consumer spending is projected to fall by at least $500 billion annually. And we are still seeing the recession work itself out in unemployment, another powerful deflator of consumption. The conventional jobless rate has risen to 8.5 percent, but the household rate—which includes people who are working part time but would like to work full time and those who have left the labor force for at least a year—is now up to 15.6 percent. Nonfarm payrolls are declining at the rate of more than 650,000 jobs a month. Unemployment is likely to set a postwar record of more than 10.8 percent sometime in 2010. Some estimates suggest it might go as high as 12 percent. Escalating unemployment means more foreclosures, a decline in other financial indicators, and further downward pressure on home prices, so we can expect retailers and producers to pull back even further, causing even more job cuts—and the beat goes on.
The collapse of consumption is on a scale not witnessed since the Great Depression of the 1930s. The Conference Board's index of consumer confidence fell to 25 in February, the lowest reading in the more than 40 years of the survey. Before the current downturn, the all-time low had been a 43 reading in December of 1974. Consumer expectations about the future are even glummer. They are down to an index number of 27.5, compared with the previous low of 45.2 in 1973, when the country was reeling from the oil shock.
The decline in consumer confidence defies the record-breaking stimulus program voted by Congress and championed by the popular President Obama. If confidence is this low now, where will we be in the fall, when we could be looking at an additional 3 million jobless, further declines in home prices, higher credit card defaults, and accelerating business bankruptcies? In that case, critics from the left and the right will be questioning whether the financial rescue package and the stimulus package have done any good. If that happens, the public may think we have experienced a policy failure—which would be another blow to confidence.