The Consumer Is Key

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Almost every financial forecast published in the last several weeks anticipates a second half economic pickup, some a relatively strong improvement. The vast majority of these seers had to revise down more enthusiastic forecasts for the first half of the year as data became increasingly sluggish over recent months. While many have recently tempered their levels of enthusiasm, almost all maintain a firm conviction that the economic expansion will soon pick up speed. While they could turn out to be right if no countries or major international banks go belly-up in the near-term, their rationale for confidence is flimsy. Many point out that most post-recession recoveries last longer than the current one so far. All else equal, that leads one to expect a longer expansion, but it provides no reason for improving growth rates.

A number of astute analysts have offered a litany of reasons that they contend will lead to a stronger second half. Most include the non-repetition of the anomalous Japanese earthquake and tsunami, plus horrible weather in the United States. Many more automobiles are scheduled to be built in the next few months. Defense spending is likely to be ramped up over the next two quarters. Banks are laden with money and their lending standards have become less restrictive. The ability for businesses to expense 100% of capital equipment purchases will be diminished in 2012, providing an incentive to make such expenditures in this year’s second half. That could pull forward some purchases that would otherwise be deferred, but it would merely be borrowing such business from the future.

The great majority of economists appear to be making the mistake of treating this recovery like all others in their experience. They fail to see this one as a bounce-back from an economic event that has seared the consciousness of consumers like no other in generations. Through the end of the past century, consumers adopted personal financial management standards based on the assumption of ever-rising securities and housing prices. They saw no reason to save. Debts were not worrisome. Beginning with the stock market crash at the onset of the past decade followed by the bursting of the housing bubble a few years later, consumer attitudes began to change. Especially as unemployment ramped up, debts became more than worrisome. Excessive debt began to overwhelm large segments of our population. Foreclosures and bankruptcies proliferated. Fear of an uncertain economic future led to deleveraging and increased saving. Consumers put their wallets on the hip and abandoned many of their carefree, “What, me worry?” spending habits. Those profligate spending patterns are unlikely to return quickly.

Most economic forecasters are concentrating on supply-side factors as the rationale for their second half confidence. I suspect they are grossly overestimating the willingness and ability of the consumer to return to a free-spending mode. No matter how significant tax incentives may be for additional capital expenditures, most businesses will avoid making major commitments to new equipment and especially to increased employment until they are confident that demand is rising for their goods and services. The consumer is the key, and the consumer is unlikely to reemerge rapidly.