As Good as it Gets?

By Chris Puplava, June 25, 2008

It sure looks that way as the stimulus checks have begun to filter into the economy with minimal effect. The month over month retail sales growth has picked up modestly recently, however the year over year growth rate continues its downward trend and is likely to continue south as the affect of the stimulus checks fade.

Figure 1

Source: U.S. Census Bureau

Though the stimulus checks have resulted in a modest bounce in the monthly growth rate in retail sales, it has done absolutely nothing to stop the bleeding in consumer confidence. No matter how you try to spin it, the Conference Board’s consumer confidence numbers released yesterday were downright depressing. The present situation component fell to its lowest levels since the last recession while the expectations index fell to its lowest levels in more than 30 years. Despite readings like these, financial pundits are still holding on to the “goldilocks” economy denying any appearance of a recession.

Figure 2

Source: The Conference Board

Consumer confidence will continue to deteriorate as long as the plunge in housing prices continues, which still shows no sign of stabilization as seen by the S&P/Case-Shiller National Home Price Index which plunged to a new low in April. As long as consumer confidence continues to erode, the growth rate in retail sales is likely to continue decelerating, so too the overall economy.

Figure 3

Source: The Conference Board

Figure 4

Source: The Conference Board/ U.S. Census Bureau

“I’m in Debt up to My Eye Balls…Somebody Help Me”
Why might Americans be so depressed? Perhaps Stanley Johnson’s story below may shed some light, click below to watch.

man pic
Source: LendingTree.com (Click for video Link)

Americans over the last several decades have leveraged up to maintain the their lifestyles. However, with greater leverage comes greater financial stress as investment banks of late have come to find out. Americans are buckling under the weight of a weakening economy when their debt levels have sky rocketed as has their financial obligations rate. Since 1980, total household debt outstanding has grown over 750%, the personal savings rate has fallen from 10.7% to 0.6%, and the household financial obligations rate has risen from 13.8% to 17.8%.

Figure 5

Source: Federal Reserve Board

Figure 6

Source: BEA/Federal Reserve Board

In the 1990 recession, consumers had a savings rate of more than 7% and were able to use their savings and disposable personal income margin to help offset financial hardships. In the last recession consumers could tap into their home to make up for falling incomes and maintain, or expand for some, their lifestyles as their savings rate fell to roughly 2% and didn’t provide the safety margin that it did in the early 1990s. This time around, as the housing ATM has been out of service, a savings rate near 0%, consumers have few options left which is undoubtedly affecting the consumer psyche. More and more consumers are tapping into their 401(k)s for cash as a last option as the following article points out.

More people are tapping their 401(k) for cash
They’re mortgaging their future in order to keep up their lifestyle

But dipping into 401(k) accounts can carry risks because defaulted loans and hardship withdrawals are taxed as income and are subject to a 10 percent penalty if the worker is under 59 1/2 years old. That means if the trend grows, many Americans will risk coming up short on retirement savings or may have to rely on an overburdened Social Security system.

"People who take out a loan or withdrawal are adding to a looming retirement crisis over the next 30 to 40 years," said Eric Levy, a partner at global consulting firm Mercer. "And what implications will that have (for) our economy?"

Some of the nation's largest retirement plan administrators, such as Great-West Retirement Services and Fidelity Investments, are seeing double-digit spikes in hardship withdrawals and increases in loan requests, a sharp departure from levels that traditionally varied little.

Administrators say consumers are using retirement savings to pay for unmanageable mortgages, maxed-out credit cards, and costly utilities and groceries.
AP: 02,19,2008

Americans have never been more unprepared for economic weakness and financial hardships than they are today, making them evermore dependent on big brother for handouts and bailouts, which is exactly the case today. Ignoring the affects of the 2005 hurricanes, more American households are collecting food stamps from the government to survive, and social benefit payments on the state and federal government levels continue to soar as we become less self sufficient and more reliant for governmental assistance.

Figure 7

Source: DOA: Food and Drug Administration

Figure 8

Source: BEA

Figure 9

Source: BEA

It is an economic fact that increasing consumption in the present leads to decreased consumption in the future through the loss of savings and compound interest. Instead of letting our money work for us, we are working for our money (consumption). Two changes need to made -- one by the consumer and one by the government; and that’s fiscal restraint. Americans need to cut back on consumption and materialism for the sake of their own future by saving for retirement by forgoing current wants. The savings rate must climb back to levels seen in decades past as social security will not cut it and may not be there at all come retirement time. The government as well needs to learn some fiscal restraint as runaway budget deficits can not go on forever without consequences (just look at the dollar). Unless changes are made to the American way of life this could be as good as it gets for quite some time.

Chris Puplava

Contact Information

Christopher M. Puplava
PFS Group
PO Box 503147
San Diego, CA 92150-3147
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