Ravengate
Partners - Stock market, economic and political commentary by Patricia Chadwick

What Shape the Recovery? V? or U?

I went to the mall yesterday to try to gain a sense of whether consumers are buying and when we might see a recovery. The first thing I noticed was that the mall parking garage was nearly empty, but then I realized that yesterday was only the second day since Memorial Day when it had not been raining here in New England and so perhaps the lack of attendance might have had something to do with people’s need to ingest a bit of sunshine.

What was in evidence were giant sales – not just 20% and 30% sales, but signs saying “up to 60% off’ and “up to 70% off”. Now that’s really a sale, and that is good, because at the very least inventory is being worked down and that is a first step in the process of getting ready for a recovery. Of course, the downside of “For Sale” signs like is that they don’t bring much profit to the retailers.

What is it going to take to get a recovery? The Federal Government is throwing as much money as it can find at the economy, but the response seems to be anemic at best. Why?

The problem is that we (U. S. consumers) are paying for our past sins – our sins of over-borrowing and over-spending. Our balance sheets have shrunk because our stocks are not worth what they were, and our houses are probably not worth what they were and now we feel poorer and we are scared. So we are trying to rebuild our balance sheets by saving, something we haven’t done in a long time.

In just the last 12 months, we, as a nation of consumers, have gone from saving NOTHING to saving at a 7% rate. That is a HUGE shift and that saving is why the economy is not rebounding. You cannot save if you spend, and we (consumers) have decided we would rather be thrifty than spend thrifty. Good for us – it is high time we became more frugal.

This new frugality is good for our balance sheets and good for rebuilding lost wealth, but it is not good for a V shaped recovery, the kind of recovery that often offsets a sharp and deep recession. Until demand picks up significantly and producers start building inventory again, a strong recovery is unlikely. In other words, until we stop saving the way we are right now, the recovery will be postponed.

The shape of the recovery will likely look like a big U, with a prolonged period of stagnancy in the economy before a more gradual recovery commences. And that will be when consumers – in particular the 75 million baby boomers who are facing retirement over the next 10 to 15 years – again feel confident that their over borrowing has been paid down, and their balance sheets can support them in their retirement. It will take time.

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One Response to “What Shape the Recovery? V? or U?”

  1. Marcos Torno Says:

    Thank you for highlighting the problems we face today as retailers and consumers. Keep up with your good work. It is very educating and refreshing.