Savings Rates Could Double or Triple

One of the reoccurring questions that keeps popping up is whether the recession has caused a long-term shift in American consumption patterns. Former Federal Reserve economist suggests that a $14 trillion loss in personal net worth and rising long-term costs like health care will lead to much higher savings rates. See the following post from The Street, to learn more.

Paul Ballew is a former Federal Reserve economist. He currently serves as senior vice president of Customer Insights & Analytics for Nationwide Mutual Insurance Co. in Columbus, Ohio. He has also worked as an executive for General Motors and J.D Power.

There's no arguing that the economy is beginning to recover. Green shoots are more numerous and the return to more normal conditions in financial markets is certainly comforting. So 12 months post-Lehman, it appears that there is light at the end of the tunnel.

However, the severe economic contraction was not just happenstance. The structural problems in the economy were substantial and some issues, like the de-leveraging of households, are still working themselves out. In addition, the policy environment complicates the situation and will, in all likelihood, place further restraint on the pace of the recovery and eventually the expansion.

Beyond the headlines about Wall Street and beyond the policy debate in Washington, substantial shifts in consumer behavior on Main Street are going to have the most significant impact on the direction of the economy over the next few years.

Everyone is speculating about how consumer consumption and saving will be altered by the events of the past 18 months. While weak labor markets are an issue for American households, an even more pressing concern involves the fundamental need to rebuild balance sheets under those same roofs in preparation for an uncertain future.

Conventional wisdom seems to conclude that we should expect a few quarters of higher savings and then a return to the pre-recession spend-and-borrow tendencies of the past decade or so. However, the need to rebuild personal savings and portfolios is no small matter. Households have seen their net worth decline by $14 trillion at a time when future obligations like long-term health-care costs continue to increase.

There is good reason to expect household savings rates will have to double, and maybe triple, to support the healing of consumer balance sheets. This process will take years, not months.

In hard numbers, it means going from saving roughly $150 billion a year to $400 billion to $500 billion a year. This assumes asset prices appreciate at a moderate pace over the next few years -- not something that is guaranteed given the pressures coming from Washington.

A shift of these proportions will not only impact the pace of the recovery, it also has implications on sectors of the economy.

Consumer-product companies are likely to face a more frugal consumer even as the recovery picks up speed. The recovery may not be the retail panacea some assume.

Additionally, the retirement-planning business may have never looked better. Now more than ever, there is a tremendous challenge and an opportunity for financial experts to help households navigate the waters and address their anxieties after a decade of underperformance.

And as we all know, Washington remains the most challenging wild card. Changes in tax and regulatory policy by Congress, high deficits absorbing higher personal savings, and future actions by the Fed are all question marks that may alter the operating environment.

We are on the front end of a recovery, but we shouldn't underestimate the depth of the recession's impact on consumer saving nor the consequences for the recovery.

This post has been republished from The Street, an investment news and analysis site.

Home Depot Raises Expectations As Consumer Confidence Grows

Home Depot raised profit expectations as consumer confidence continued to grow for the fourth straight month. Retail sales also exceeded expectations, which could mean that consumers are more optimistic about the economy. This could expedite economic recovery as consumers account for over two-thirds of US economic activity. For more, see the following post from our friends at Money Morning.

Are consumers’ happy days here again, or are the recent signs that growth in sales, confidence and an overall improvement in the economy just a mirage?

Confidence among U.S. consumers rose this month for a fourth straight time, according to the Reuters/University of Michigan (UM) preliminary index of consumer sentiment. The index increased to 69, which is less than what was forecast but still the highest level in nine months. May’s index was 68.7.

“Confidence is slowly but surely coming back,” James O’Sullivan, a senior economist at UBS Securities LLC told Bloomberg News. “In the next few months we should see more follow-through in the labor market, which in turn should give confidence a further boost, which in turn should lead to a sustained recovery in consumer spending.”

Another report from Investor’s Business Daily and TechnoMetrica Market Intelligence’s “Economic Optimism Index” shows consumer confidence rose to 50.8 this month from 48.6 in May. A figure above 50 indicates optimism, while one below 50 reflects pessimism.

“Consumer confidence is building on the momentum that it picked up in April, reflecting the strength we are seeing in the stock market," Raghavan Mayur, president of TechnoMetrica unit TIPP said in a Reuters interview. "Across the board, there is an optimistic feeling that the economy is recovering.”

The rise in consumer confidence is not just idle talk-consumers are backing it up at retail with their wallets.

Retail sales in May increased by 0.5% over April following four straight drops, according to a Commerce Department report released last week. Economists were anticipating a 0.2% gain, according to The Associated Press. The general merchandise, food stores and restaurant categories were the ones in the sector that posted significant gains.

Retailers like The Home Depot, Inc. (NYSE: HD) reflect consumers’ confidence and the increase in sales. The home improvement chain raised its forecast for the year, saying its profit would anywhere from flat to a 7% drop. It previously gave guidance that profits would be down 7%.

But the optimism should be tempered, as the “rules of engagement” will be different in the post-recession economy, according to Deloitte Strategic Advisor Richard Hyman.

Big financing promotions, which propelled a lot of consumer spending in the last 10 years, is all but gone now that credit is tighter, according to Hyman.

“Consumers were also able to spend more because of the easy availability of credit, most notably through mortgage equity withdrawal and they responded by buying more items,” Hyman said. “These conditions underpinned retail growth for the past 10 years but have now disappeared. However, it’s worse than that. They will clearly not return once the recession is over.”

The worst economic downfall has produced scars on the spending habits of consumers, and it’s likely that when the dust clears, most will demonstrate they have learned their lesson about reckless spending.

“This will produce polarization: needs-driven spending will gravitate towards retailers able to tick the most important consumer boxes like price and convenience,” said Hyman. “Although it will remain the engine of retail growth, wants-driven spend will slow and consumers will be much more choosy.”

This article has been reposted from Money Morning. You can view the article on Money Morning's investment news website here.

Consumer Confidence Shows Drastic Improvement

In past recessions consumers may have already started to rush back to the malls, but this time might be different. Instead of going back to the shopping centers, consumers may instead be sending their money to credit card companies to pay back their high levels of debt. So what should we make of consumer confidence increasing the most in six years? Tim Iacono from The Mess That Greenspan Made explains why a sudden improvement in consumer confidence may not be as significant as it first appears.

Reuters reports on the sharpest increase in U.S. consumer confidence in more than six years. But, don't get overly excited (like the stock market currently is), the American shopper is still quite depressed by historical measure.

The Conference Board, an industry group, said on Tuesday its index of consumer attitudes jumped to 54.9 in May from a revised 40.8 in April, the biggest one-month jump since April 2003. Economists had been looking for a much smaller rise to 42.0.

Fewer Americans said jobs were "hard to get," the survey found, with that measure slipping to 44.7 percent from 46.6 percent. Those saying jobs were plentiful climbed to a still meager 5.7 percent, but that was still higher than April's 4.9 percent.

"Consumers are considerably less pessimistic than they were earlier this year," said Lynn Franco, director of The Conference Board's Consumer Research Center.

Once again, less bad is the new good, the "considerably less pessimistic" assessment being cause for some to get out the bubbly and celebrate, at least for a little while.

More details...

The survey offered mixed messages regarding Americans' propensity to spend money. The proportion of those who said they planned on buying a car over the next six months rose to 5.5 percent, its highest in at least a year.

But fewer intended to buy homes -- only 2.3 percent, a tough break for one of the hardest hit sectors in the country's economic crisis. A separate report on Tuesday revealed U.S. home prices dropped 18.7 percent in March compared to a year earlier.

Here's a graphic from the Wall Street Journal showing how the expectations index has surged past the present conditions index in a manner similar to the 2003 bottom. Since confidence had sunk to such historic lows in recent months, like many other economic indicators, comparing recent developments to patterns seen in previous recessions may not provide all that much relevant insight.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.