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The Daily Reckoning

Consumers won't save the US economy

The US is waiting for a consumer-driven economic recovery, but it isn't likely to come. Consumers don't have jobs or credit, and they're in no position to borrow.

By Guest blogger / March 22, 2011

A pedestrian carries shopping bags while walking on Market Street in San Francisco in December 2010. About 73 percent of the US economy comes from consumer shopping. Will consumers really be able to save the economy?

Justin Sullivan/Getty Images/File

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The Great Correction intensifies…

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The Dow rose on Friday. The dollar fell. Gold is back over $1,400. And the euro – the world’s most despised currency – is back over $1.40.

A chart circulates, supposedly proving that GDP is now back to where it was in ’07, after falling only 4% in the downturn.

We don’t believe it; they’ve juked and jived the figures.

None of the key components of US GDP have recovered. Housing starts, for example, are running at a million less than they were before the crisis began. Employment is back to the levels it was at 10 years ago – with 7 million fewer jobs than in 2007! Retail sales are going up – but they are still not at the level they were in ’06 or ’07.

So how could the overall economy recover, while the most important parts of it do not?

The real answer: the economy hasn’t recovered. And the Great Correction hasn’t gone away. Instead, the correction is like a hurricane sitting just off the coast. It took a swipe at land, and now, it’s back out at sea; its winds are picking up speed. It’s getting larger…stronger… It’s intensifying.

Why?

As we’ve said too many times, none of the problems that led to the crisis of ’07-’09 were corrected. Instead, they were twisted into awful new shapes. They’re still there – swirling around, worse than ever.

Approximately 73% of the economy comes from consumer shopping. So, in order for the economy to grow, consumers have to be able to shop, right? But how can they?

Properly adjusted for inflation, the average wage is lower today than it was in 1973. That’s right, almost 40 years of going nowhere.

Well, hold on…we know what you’re thinking: “What are you talking about? There were some great years for the US economy between ’73 and ’07.”

And you’re right. But they didn’t come from solid, real growth in consumer purchasing power. Instead, they came from two sources:

First, consumers borrowed more. Total debt went from about 150% of GDP to over 370%. The financial industry went wild, sending our credit cards to dogs and dead people…lending money to people without jobs or income…writing mortgage contracts with built-in fuses.

This was not healthy growth. It was not sustainable. It just took “growth” from the future and moved it forward. Want to know why the housing industry builds so few houses today? Easy. It already built today’s houses yesterday. Why is a credit-fueled boom not sustainable? It’s because credit markets go up and down, just like all other markets. When credit is cheaper, people borrow more and buy more. When credit becomes more expensive, they have to pay down their loans and stop buying so much.

Second, during the period ’74 to ’07 more people worked longer hours. The whole family went to work; not just the head of the household. And they worked more hours. This was proclaimed as a great era for women. They went to college. They got jobs. And they had families too. Now, they no longer supplement their husband’s salary. They’ve become equal partners in the household…often, senior partners. The lucky ladies; they get to work two jobs now – one at the office and another one at home!

Up until 2007, the feds could counteract every attempted correction by making more credit available at lower prices. But by 2006, the credit machine no longer worked. The private sector economy was saturated with debt. It couldn’t take any more.