Why Consumers Aren't Spending
A weak housing market continues to weigh down the economy
Politicians are putting a lot of stock in plans and legislation designed to resuscitate the economy, proposing everything from tax credits for businesses that hire to expanding and expediting trade agreements with other nations.
But will passing another stimulus bill restore consumer confidence, the absence of which has severely hampered economic growth and progress toward recovery?
Experts aren't so sure. Despite the fact that the economy is growing -- albeit, extremely slowly -- and the economy hasn't begun to shed jobs yet, consumer sentiment remains in the dumps. Americans feel slightly more secure in the workplace, but on the whole they feel "worse off" financially than last year, according to a recent survey by
"The issue is 'Why aren't people spending?' and 'Why aren't they confident of their ability to spend more?'" says
But that hasn't been enough. According to experts, the ASR survey underscores the deep scars of the Great Recession, in particular how the credit crunch and housing meltdown have fundamentally changed Americans' opinions about debt and housing as a foolproof investment.
"People still feel very insecure, they're worried, and it's changing their attitude about debt," says
Household worth fell about
Why do housing values really matter? According to the Fed, the bottom 80 percent of American households hold only 7 percent of the total value of all financial assets in the economy. But that same 80 percent holds about 40 percent of all residential real estate assets, which means more Americans rely on and perceive their wealth from the value of their home.
"Home equity is the only widely held asset in America, and home equity is very sensitive to shifts in housing values," Shapiro says. "You have a very powerful negative wealth effect going on."
In previous recoveries, a run-up in housing values made Americans feel wealthier and more apt to spend, even though wages had stagnated. This time around, the reverse has happened. Wages have stayed flat, but housing values have plummeted.
When housing takes a hit, so does Americans' perception of wealth. If they feel less wealthy, they're likely to spend less, which feeds into a vicious cycle of less spending, less economic growth, and less confidence.
"It's a feedback loop where weakness of growth, unemployment, household wealth not doing well, and the political uncertainty surrounding future regulatory policy all make for low consumer confidence," says
But while Americans remain pessimistic about the prospects for dramatic improvement, most don't feel the economy is destined to take a nosedive either, perhaps one slightly comforting nugget in all the dismal data. A recent survey of financial professionals revealed that based on interactions with clients, more than 54 percent believe the economy will remain lodged in its current state of limbo.
"We're mired in a lot of uncertainty across the board and the results speak loudly to the fact that people feel like [the economy] is going to be the same, we're spinning our wheels," says
So how do we break the cycle?
One of the major criticisms leveled at President Obama's much-anticipated American Jobs Act is that it overlooks the housing crisis. While Obama floated the idea of working more closely with the
A push for better access to refinancing options could give the housing market and the economy a small boost by potentially stemming the flow of new foreclosures, but with more than 3.5 million first-mortgage loans in or near foreclosure and more price declines likely, the outlook is grim.
"Most worrisome is the risk that housing will resume the vicious cycle seen at the depths of the last recession, when falling prices pushed more homeowners under water causing more defaults, more distress sales, and even lower prices,"
While the Fed has promised to keep interest rates low for the next few years, more intervention from the central bank is uncertain. That leaves fiscal policy to pick up the slack, the specifics of which
That's a frightening possibility, especially in light of Americans' reduced spending and increased savings rates. Americans are pulling back and becoming increasingly risk-averse, according to ASR's survey -- 50 percent of respondents said they would not take any risks with their savings, compared with 40 percent two years ago.
"People have been up against this headwind for two years and it's starting to darken the whole mood," Bowers says. "America is known for being a great entrepreneurial society, the land of opportunity. This is about people going back into their cabin, shutting the door, and hunkering down. This is about survival mode."
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