After a year in office, the Obama administration has finally made job creation its top priority, but in all the rhetoric about small business stimulus and incentives to foster lending and tax credits for hiring, one key element has been missing – the consumer.
Ask anyone who runs a Main Street business what’s holding back the economic recovery, and they will likely answer in a word – sales, or more precisely a lack thereof.
Neither consumers, nor businesses are spending at anywhere near the level needed to sustain the economic recovery. Without incentives to do so, the outlook for job growth and lower unemployment over the next year is weak, at best.
Indeed, the near collapse of the financial system and the ensuing shock to the economy has fundamentally altered how people and businesses think about money, according to a Douglas Berlon, a global practice leader for financial services at Gallup Consulting.
A recent Gallup survey revealed that that 62 percent of people polled in survey now consider themselves savers, not spenders. In 2001, only 48 percent of folks surveyed qualified themselves as such. Meanwhile, the U.S. personal savings rate reached 4.3 percent in 2009, the highest in a decade, according to Financial Planning magazine.
People are just spending less. The average person spent $89 per day in December 2008, when holiday shopping is in full swing, but just one month later, in January 2009, spending dropped down to $64 per day, according to Gallup’s survey.
Last December, the average person doled out $73 per day, but only $61 per day in January 2010. Even the rich are acting more and more like the rest of us. Households with incomes above $90,000 a year cut spending by 13 percent over last year, Berlon noted.
One big source of consumer spending — home equity financing – will take years to recover. During the real estate boom, between 2000 and 2005, consumers spent roughly $113 billion a year on everything from home equity loans to purchases such as cars or televisions, according to BusinessWeek. The magazine, citing a 2007 paper penned by former Federal Reserve Chairman Alan Greenspan and Fed economist James Kennedy, also stated that during that time $376.2 billion went toward home renovations.
But over the last two years, home equity and credit card lines of credit have declined by an astonishing $1.6 trillion after many banks froze accounts in the face of the residential real estate slump. It could be said that in many markets, banks simply overreacted, especially given the fact banks made about $34 billion in home equity loans in 2008, according to Moody’s Economy.com.
Companies, meanwhile, are “sitting on a mountain of cash,” according to Nariman Behravesh, chief economist at IHS Inc, a corporate consulting firm. Over the past 12 months, U.S. corporations have accumulated cash on hand equal to about one-tenth of the nation’s gross domestic product — a near record high, according to an IHS analysis of Commerce Department data.