Monday, September 28, 2009



I’ve made no secret of the fact that I have serious reservations about the sustainability of any strength in our economy. I’ve tried to document and chronicle most of the reasons for my doubts as I’ve seen them. (See any of my previous posts here or my hundreds of posts over at

I had a long talk with Bonddad this week about the nature of my skepticism. It all boils down to the consumer. Here is a follow-up to our conversation, and here are more of the reasons I'm not sold on recovery.

We know that the consumer has been 70% of GDP. I’ve written about it both here and elsewhere. We know that the consumer took his Debt/Income ratio to a very unsustainable 136% (now 129%), and that it was debt-financed consumption that contributed mightily to our current woes as we spent beyond our means and saved, literally, nothing for some time. I recently demonstrated that just to return Debt/Income to its trendline (114%) would involve retiring roughly $1.6 trillion, and getting back to the mean is virtually unthinkable. We know that the median age of boomers is now 52, and that this cohort is likely more concerned with retirement planning and rebuilding his/her nest egg than with aggressive consumption or aggressive investment strategies.

Beyond that, as I saw Joseph Stiglitz pointing out yesterday on Bloomberg television, this was not a recession caused by any of the typical reasons (e.g. manufacturing/inventory hiccup or the Fed hitting the brakes a bit too hard). This recession was born of the popping of a massive credit bubble that was years – if not decades – in the making, and will likely be years in the unwinding.

On to some interesting charts I saw this week in David Rosenberg’s work, and have taken the liberty of replicating. They (obviously) all support my thesis.

Above is yet another indicator of how weak the labor market is, as we see the number of people working part-time for economic reasons is easily at an all-time high. Yes, the labor market is usually a lagging indicator, but as I recently documented, its weakness this time around is far greater than we’ve seen in any post-war recession.

In part because of the slack in the labor market, we are now experiencing wage deflation, as “organic” income is on the decline:

Organic wages are on the decline. “Transfer payments” – more largesse from the government – are the only component of income that’s growing. (Note that I’m not arguing the government should not be stepping in, just pointing out that wages, dividends, interest income, etc., are all declining.)

Couple the decline in income with the fact that credit is now (very understandably) contracting:

As a result of both declining income and contracting credit, it stands to reason that Personal Consumption Expenditures would drop, and in fact they have:

I previously mentioned the median age of boomers, and in the past have written about the increase over the past several decades in Durable Goods/Household (now at about $37,000). Part of this growth was attributable to Boomers moving through their peak consumption years, which are now behind them.

Let’s take a look at another very interesting chart that flows from the increase in Durable Goods/Household: Vehicles on the Road/Licensed Drivers:

The question needs to be asked: How many more vehicles/driver are we going to put on the road? How many cars/driver do we really need? Further, I will respectfully disagree with Bonddad and state for the record that there’s little doubt in my mind that Cash for Clunkers pulled forward some (perhaps unquantifiable) amount of future sales. The run rate didn’t go from ~9MM annually to ~13MM annually on its own. Unfortunately, it appears we’re headed back down toward ~9MM again, so it’s hard to believe the Clunker program didn’t cannibalize some Q4 sales. Keep in mind, too, that scrappage is about 12MM vehicles/year so we are, in fact, taking cars off the road, which would be consistent with the trend of the chart above beginning to turn down.

The U.S. Homeownership rate, which had peaked at 69% and is now on the way down, still has a way to go on the downside (probably to about 65% or so):

Now, none of this is to say that the recession may not “technically” be over. However, as Paul Krugman recently noted, that may indeed be irrelevant. Based on some correspondence with members of the National Bureau of Economic Research’s Business Cycle Dating Committee, I’m led to believe that they’re inclined to view growth from all sources – be it it private sector or government – equally. So the life-support the government has provided may well be enough to “officially” declare an end to the recession. What the private sector looks like absent the public support, however, is another story altogether, and one that has yet to be told. That is the crux of my concern: How do crippled consumers take the handoff from the government when stimulus programs and funding begin to wind down and end. And therein lies the story of what I believe might well be a double-dip, or at the very least sub-par growth for as far as the eye can see.

Does Blogger suck, or is it me?

[Note to commenter on original post: The Boss asked me to hold the post until Monday, so I took it down and rescheduled it. Sorry for having lost your comment.]