Wednesday, December 23, 2009

Why you're dumb if you expect economic recovery in 2010

SHOOT: Simple answer - the consumer is dead. The consumer is dead because debt [borrowing] is dead. Borrowing is dead because banks are dead. Banks are dead because the economy is fucked. Now we can play games in Copenhagen and spin our little yarns to ourselves, but eventually reality will catch up. Eventually being in 2010. When the penny drops, expect lots of tears.

-- Households are trimming debt. Total household debt, including mortgages, credit cards, autos and other consumer loans, stood at $13.6 trillion in the third quarter of this year, according to the Fed. That's down from $13.7 trillion in the second quarter. Debt reduction is healthy for personal finances but not for economic growth: Consumers pare debt with money they might otherwise spend.

-- Most Americans -- 80 percent -- plan to use cash for all their holiday purchases, according to an Associated Press-Gfk poll. Using cash is a way to stick to budgets and avoid impulse purchases. It suggests consumers are wary of spending freely -- whether for gifts or other purchases.

While holiday sales aren't vital to economic growth, consumer spending as a whole is: It accounts for about 70 percent of it.
clipped from
AP - In this Dec. 21, 2009 photo, Women carry shopping bags as they walk past a French Connection UK ...

Here's why holiday purchases won't save the day:

-- They make up a surprisingly small share of the economy. Last year, gift sales were estimated to account for less than 13 percent of the fourth quarter's gross domestic product. And Mark Zandi, chief economist at Moody's, thinks they'll account for about the same share of this quarter's GDP -- the value of all goods and services produced in the United States.

-- Many consumers can't get loans. That makes it hard to buy costly items -- from cars and homes to appliances and jewelry -- related or unrelated to the holidays. Even as the economy returned to growth last summer, consumers borrowed 0.6 percent less from July through October, according to data from the Federal Reserve. Even if holiday sales shine, tight credit will hold back spending in coming months.

-- Unemployment has hit double digits and is expected to remain near or above 10 percent well into next year, far above a "normal" rate of 5 or 6 percent.

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