October 25, 2011 / 4:05 PM / 6 years ago

COLUMN-American Dream turns to gloom: John Kemp

By John Kemp

LONDON, Oct 25 (Reuters) - 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.

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