When will US consumers be ready to spend again?
That's the central issue hanging over the economy, and the stock market sagged Monday as investors focused more closely on the hurdles that consumers face even when a recession ends.
The factor that commonly lingers after recessions is worry about possible job losses. But this time, Americans are also grappling with fallout from the unusually steep decline in home prices.
That has caused about one-fourth of America’s household wealth to disappear in the past two years. Despite signs of some stabilization in the housing market lately, by one new estimate one-third of all US mortgage borrowers have "negative equity," with loan balances bigger than their home's market value. The magnitude varies a lot by region, but it's not just a California and Florida thing.
"Consumers have had an attitude adjustment," says Charles McMillion, chief economist at MBG Information Services in Washington. "The decline in consumer spending is likely behind us. [But] I don’t think that the consumer is going to be the engine to drive a strong recovery."
The decline in household asset values – mainly homes but also the stock market – is "far beyond anything we've seen before" in the era after World War II, Mr. McMillion says.
This doesn't necessarily mean that the economic recovery will be weak. But it adds a high element of uncertainty, and what lies ahead will be a period of only tepid growth, many economists say, rather than the strong rebound that has often followed deep recessions.
The uncertainty is visible in the stock market. Although share prices have generally been rising since the spring, when fears of a severe credit crisis began to fade, on Monday the Dow Jones Industrial Average began the day with a nearly 200-point drop.
Corporate profits have been rising in recent months, but investors are keenly aware that much of the gain stems from companies paring their costs rather than from rising sales.
Still, the good news is that economists and investors aren't generally expecting a continued decline in consumer spending. The doubt, rather, is mainly about the strength of a recovery.
A few forecasters call for a fairly solid rebound, as credit markets improve and as workers gain confidence that the worst layoffs are over. Others say that, even with help from tax breaks and other government stimulus programs, consumers will at best return to tepid spending growth of about 2 percent – not enough to kick the economy into high gear. McMillion, for his part, sees a tepid recovery, with a 50 percent chance of lapsing back into recession late next year.
How can consumer spending expand when Americans are trying to save more of their income? This can happen if the increase in saving is spread out over time and if incomes continue rising in the meantime, economists say.
Many households are saving more of their income because of the decline in net worth. According to data tracked by First American CoreLogic, 15.2 million mortgage loans were in a negative equity position as of June. The problem is biggest in Florida, Nevada, Arizona, California, and Michigan. Still, in many states -- including Idaho, Missouri, Utah, and Georgia – one-fourth or more of all home loans are in this "upside-down” position.