Weak consumer spending this year has left Wall Street analysts and the financial media
searching for explanations especially as more people find jobs and stocks reach record highs.
Ethan Harris, chief global economist at Bank of America Merrill Lynch, said the financial crisis of the past decade has left a lasting effect on consumers who are saving their money instead of borrowing and spending.
“Just as the Great Depression spawned a generation of conservative spenders, the Great Recession may have caused greater caution,” he said in a June 5 report
obtained by Newsmax Finance. “Presumably the illusion that ‘home prices never go down’ has been shattered, along with faith in a more stable business cycle and belief in a reliable retirement system.”
The collapse of the housing bubble, which belied former Federal Reserve Chairman Ben S. Bernanke’s statement in 2005 that “we’ve never had a decline in house prices
on a nationwide basis,” triggered the deepest recession in 80 years. Unemployment surged to a 30-year high of 9.9 percent and the homeownership rate slid as more than 5 million households fell behind
on monthly mortgage payments.
Consumer unwillingness to spend is evident in the data on retail sales excluding gasoline and cars, which fell to a 0.2 percent annual rate from December to April from 3.3 percent in 2014, according to the Census Bureau. Wage and salary income has grown 4.8 percent from a year earlier, but the personal savings rate
has stayed above 5 percent.
Harris said consumer thrift defies economic forecasts that are based on the bygone spending habits of the baby-boom generation.
“Recall that starting in the late 1970s the baby boom generation started to replace the depression generation as the dominant income and spending group,” he said. “While a number of things were going on here, one was the ‘wealth effect’: rising asset values convinced people that they did not have to save to accumulate net worth.”
Applying the economic models of yesteryear can lead to significant overestimates of how consumer spending will react to rising home values, equity markets and employment, he said.
“The models want consumption to boom, driving down the saving rate, but the actual saving rate shows no clear trend,” Harris said. “This is particularly notable since 2012, when the housing market joined the stock market boom. In other words, greater consumer caution seems to have fully offset the normal wealth effect.”
He said the savings trends will become clearer later in the year, as consumers respond to changes in wages, work hours and gasoline costs.
“Our forecast assumes that there is a lagged response to the fall in gas prices,” Harris said, “and consumption reaccelerates, causing the saving rate to drift back down from 5.6 percent to 5 percent.”
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