Yesterday’s edition of The New York Times featured a good read on the U.S.’s worrisome lack of consumer confidence. We’re spent, by David Leonhardt, makes the now familiar argument that this is no run-of-the-mill recession. We are experiencing a correction of genuinely historic proportions. Jeff Immelt’s contention that this is an “emotional, social, economic reset” back in November 2008 was right on the money.
“We are living through a tremendous bust. It isn’t simply a housing bust. It’s a fizzling of the great consumer bubble that was decades in the making,” wrote Leonhardt in yesterday’s paper. “Now, the economic version of the law of gravity is reasserting itself. We are feeling the deferred pain from 25 years of excess, as people try to rebuild their depleted savings.”
A friend of mine who works in finance – a woman whose judgment I trust – said much the same thing to me last week. She has expected this recovery to take 10 to 15 years all along. Consumers overextended themselves for decades, she told me. And so this is not a typical downturn in which spending and employment rates come back in a matter of quarters.
I have personal memories from each of the past three decades that align closely with this view:
- I worked in a record shop between 1985 and 1989. It was an extraordinary time in that industry. Rap music had become mainstream and compact discs were pushing vinyl records out the door. I was staggered by the sales figures we were ringing up. The holiday shopping season was a blur of credit cards and $20 bills. But it all felt somehow artificial. By 1986, as the economy boomed, it became increasingly clear to me that we were selling LPs and CDs to people who should have been saving their money. My most vivid memory was of a young couple, recently married I supposed. He was a regular who would come in every Saturday and buy a handful of 45s. One day his wife came with him. “Sure, buy more records,” she said, loud enough for those around them to hear. “We can’t afford furniture but you can buy records.”
- By the 1990s, I’d begun my career in journalism. I helped launch a magazine for financial advisors in 1998. And the next year I was named editor of a business magazine for benefit and pension plan sponsors. Around that time I remember talking with a fellow journalist about the extraordinary run-up in stock prices. Could it continue, I asked him. His answer captured the overconfidence of that time. “It has to,” he told me. “The baby boomers need to keep saving for retirement, so they need to keep investing. Where else are they going to put their money?” This later became known as the belief that trees could grow to the sky.
- Of course the stock market suffered a major correction just a couple of months into the 2000s. Low interest rates became a kind of hallmark of the new decade, and real estate prices swung up as a result. Suddenly, what Canadian homeowners could afford was defined by monthly carrying costs rather than by the length of time it would take to actually pay down the debt. My wife and I bought a small Toronto home in early 2004 that seemed at the time about twice the price I ever expected to invest in real estate. Seven years later, we sold for 55% more than we paid. It was on the market for one week.
Shortly after launching Today’s economy, I wrote a piece about the new frugality trend which by that time had caught the attention of TIME magazine. I argued it would pass. “Canadians – and Americans for that matter – may ease up on their spending in the short-term,” I wrote. “But they will turn back to their beloved Consumer Therapy soon after the recovery is called.” I’d write that piece differently today, but I still don’t think consumers have entered a new period of genuine frugality.
Their capacity to spend has been curtailed, no question. But that’s got more to do with debt fatigue than it does some penny pinching revelation. This too shall pass.