Thrift is the new black

But will people refuse to spend once things improve? Plus what do you get when you mix a deep recession with Miley Cyrus?

by Jason Kirby

EconowatchMeet the Walkers. They’re the latest embodiment of the culture of thrift said to be sweeping America. And their story, after it was reported a few days ago in the Washington Post, lit up the Web as another sign that things truly have changed. You see, the old, conspicuous Walkers used to travel to the Caribbean, shop at Nordstrom, and tell friends all about their consumer exploits. Now, with money tight, Seigrid Walker has found joy in flaunting her frugality. They stay in, eat pizza, and watch Madagascar “over and over again.” Forget about keeping up with the Joneses. It’s all about keeping up, or is it down, with the Walkers.

Since the recession began, thrift has been touted as the new black. It’s more than a matter of trendspotting. Consumers make up 70 per cent of the U.S. economy. Any recovery is wholly reliant on them getting back into the malls. So when analysts tell us Americans are simply unwilling and unable to spend any more, the implications are dire. But there’s a huge gulf between unwilling and unable, and a recovery hinges on which one is truly the case.

There’s no shortage of evidence to suggest consumers’ hands are tied. Nearly six million jobs have been lost since the recession began. American households are also struggling under a mountain of debt. Even though consumers have chipped away at their liabilities, they still owe about 1.3 times their disposable income. In short, unemployment is rising, incomes have flatlined and banks have tightened their lending. No wonder consumers feel tapped.

The bigger question is: will they refuse to spend once things improve? Even a cursory glance at the history books suggests that won’t be the case. Just about every serious downturn has come with predictions about the end of consumerism. And each time a rebound has eventually come. Meanwhile, new data from NPD Group, a market research firm, shows consumers are already getting the itch to spend again. The firm’s retail response indicator, which measures consumer spending intentions, has climbed steadily since it bottomed out in March. In May it surpassed the level it was at last October, before the crisis hit full force. “We are seeing consumers move toward replacement and replenishment purchasing,” the company’s chief analyst Marshal Cohen said. “These are the kinds of purchases that would indicate we have taken the first step toward recovery.”

There’s no question it will take a very long time for consumers to regain their footing. But at the end of the day, there are only so many frozen pizzas and Madagascar viewings they can take.

GRAPH OF THE WEEK: Deserted Roads

For 15 years America’s love affair with cars and trucks has been in high gear, with sales averaging 17 million a year. As this graph shows, that’s come to a screeching halt in the past two years. If sales get stuck at less than 10 million for long, it will stall any hope of recovery at GM and Chrysler.

Deserted Roads

THE GOOD NEWS

Starter homes

New home starts in Canada rose by 9.2 per cent in May, which economists took as a sign the decline in home construction has hit bottom. If so, housing could become less of a drag on the job market and the economy. Most of the gains came from Ontario’s condo market, while formerly red-hot areas in Western Canada were stagnant. The only area to see a slowdown in home starts was B.C., which was down five per cent. But after steep declines in the past few months, even that’s considered a good sign.

Slowly, but surely

Americans have lightened their debt loads, yet again. The U.S. Federal Reserve says consumer credit fell 7.4 per cent in April, or US$15.7 billion. If this pace keeps up for the rest of the year, consumer debt will have declined by US$2.52 trillion.

A globe on the mend

The OECD’s index of leading indicators suggests the pace of decline in the world’s biggest economies is slowing. The index rose in April to 93.2 from 92.7 the month before. The organization also said the recession may have reached its low point in Canada, France, the U.S. and Britain.

Payback time

It turns out Washington doesn’t want to nationalize the banks after all. The Treasury Department said it would allow 10 banks to repay bailout money they received under the Troubled Asset Relief Program. It’s expected as much as US$50 billion will initially be handed back. Just another US$650 billion to go.

THE BAD NEWS

But where are the jobs?

Investors tried hard to find “green shoots” in the latest Canadian employment numbers, but it was still a grim picture: 42,000 lost their jobs in May. Making matters worse, all the talk of recovery has lured job seekers off the sidelines and back into the market, driving unemployment up to 8.4 per cent, the highest it has been in 11 years.

Extreme turbulence

The world’s airlines are expected to lose US$9 billion this year, according to the International Air Transport Association. Just three months ago the IATA was predicting a loss half that size.

Rates on the rise

In the U.S., 30-year mortgage rates jumped last week, threatening any nascent recovery in the housing market. Here’s the nasty irony: as investors grow more confident, they’re fleeing U.S. Treasuries, driving yields higher, which seriously complicates the Federal Reserve’s efforts to keep lending rates low. The more optimistic people get, the more difficult it is for a recovery to take hold in the crucial housing sector.

SIGNS OF THE TIMES

SIGNS OF THE TIMES

  • What do you get when you mix a deep recession with Miley Cyrus? Thousands of cheering Wal-Mart shareholders. The teen pop star performed at the company’s annual meeting in Fayetteville, Ark. Amid tough times, Wal-Mart has seen its share of the U.S. retail market rise to 11.3 per cent from 10.5 per cent a year ago. The company clearly expects demand to continue—Wal-Mart just announced it will hire 22,000 new workers for its U.S. stores this year.
  • It’s no secret that with high gas prices, the Hummer is a tough sell among drivers. Now it seems GM’s efforts to unload the whole division may hit a wall. A day after declaring bankruptcy, GM found a deep-pocketed buyer in China willing to take the Hummer off its hands. But some think Chinese regulators may block the deal. It seems Beijing wants companies to focus on fuel-efficient cars.
  • Recessions may be good for Hollywood, but not Bollywood. India’s movie industry is hurting. It’s estimated 30 per cent fewer colourful song and dance films will be made this year. The problem is foreign investors have lost their appetite. In 2009, they pumped US$700 million into the industry. So far this year: just US$25 million.
  • Even U.S. Treasury Secretary Timothy Geithner can’t sell his home. After a month of trying to find a buyer for his Westchester County, N.Y. pile—he’d already cut the price to US$1.575 million, less than what he’d paid for it—Geithner was forced to rent it out for $7,500 per month. At that rate, many real estate agents believe he’s in the red after mortgage payments and property taxes.

LATEST INTELLIGENCE

Suddenly everyone has noticed America’s staggering debt load. For years a handful of economists warned of the country’s out-of-control finances. During the darkest days of the recession, investors flocked to U.S. Treasuries as a safe haven. But now, they’re fleeing instead, over fears that America’s trillion-dollar deficits are unsustainable and will spawn another financial crisis.

“I will make it clear that we are committed to a strong dollar, that we are committed to bringing our fiscal deficits down over the medium term.”—Timothy Geithner, U.S. treasury secretary, ahead of a meeting with officials in China, America’s largest creditor

Ben Bernanke“Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth. Maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance.”—Ben Bernanke, U.S. Federal Reserve chairman

“Simply put, the U.S. fiscal circumstance has become a laughingstock.” —Dennis Gartman, author of the Gartman Letter

Bill Gross“While policy makers, including the President and Treasury Secretary Geithner, assure voters and financial markets alike that . . . a return to fiscal conservatism is just around the recovery’s corner, it is hard to comprehend exactly how that more balanced rabbit can be pulled out of Washington’s hat.”—Bill Gross, managing director, PIMCO

“It could create a rising tide of interest rates that wipes out the effects of any stimulus, undermines any recovery, and sabotages any new bailouts.”—Martin Weiss, president, Weiss Research, Inc.

THE WEEK AHEAD

Friday, June 12: The University of Michigan will release its closely watched Consumer Sentiment Survey. It’s expected to continue its three-month rise as job losses become less severe.

Monday, June 15: Statistics Canada will report new motor vehicle sales for the month of April, and analysts expect a modest increase.

Wednesday, June 17: The U.S. will report its Consumer Price Index, which is expected to remain flat at zero per cent.

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