By John Kemp
LONDON Oct 25 U.S. consumers have given up
hopes of a recovery, according to the gloomy findings of the
Conference Board's regular survey, in a sign recessionary forces
are still gathering momentum and the economy is set to slow
further in the next few months.
Consumers who expect their total household income to shrink
in the next six months (19.2 percent) outnumber those who expect
it to rise (10.3 percent) by almost two-to-one. The negative
balance (-8.9 percentage points) is the worst since
February-April 2009, when the economy was contracting.
Households are far more pessimistic than in the aftermath of
earlier recessions ().
Confidence in future income growth peaked in February and
then began to slide consistently as households were battered by
a combination of rising prices, an upsurge in financial
volatility and a stalling economy.
Like business surveys, consumer confidence surveys must be
interpreted with care. Responses are strongly shaped by what
consumers have read about the health of the economy in the
media, creating the risk of a circularity in which media
reporting and survey responses feed off one another.
So specific questions such as expectations about household
incomes are more useful than general ones about the state of the
economy or the overall outlook. Pessimism about family incomes
is therefore particularly worrisome, since it suggests
households believe their own situation will worsen rather than
improve in the short term.
That pessimism appears rational and realistic. The fallout
from losing a job is now worse than in previous recessions given
low rates of rehiring and the increased risk of becoming
long-term unemployed or forced to accept significant wage
reductions. Even for families that remain fully employed,
nominal wage growth is minimal, and rising prices for food and
fuel are cutting into the real inflation-adjusted value of
incomes, leaving them worse off.
Fears the financial situation will worsen help explain why a
significant number of consumers are trying to eliminate old
debts as quickly as possible and why a culture of thrift has
taken root as shoppers seek to stretch their stagnant incomes
further by trading down.
With so little optimism, policymakers and investors cannot
rely on consumers to be the main engine for recovery.
It makes no sense for households to take on additional
borrowing if a clear majority believe their situation will
become more precarious in the next few months. The only
borrowers are likely to be distressed families with no option --
in which case credit, rather than being sustainable, is
postponing inevitable adjustment of spending patterns.
Only an increase in risk-taking by businesses (through a
combination of investment in plant and equipment and hiring) or
a sustained pull-back in food and fuel prices can jump start the
recovery, and so far there is no sign of either happening.